Creditors Voluntary Liquidation (CVL)

This is the most common insolvency process followed by companies in the UK.

A voluntary winding up procedure to be implemented where a sale of the business is unlikely to be achieved or where the costs incurred in administration would be disproportionate to the realisable value of the assets. The procedure up to the appointment of the liquidator is controlled by the directors.

Confusion often arises from the use of the term, “voluntary” since many believe this to be a term used for companies that are solvent.  A  liquidation is voluntary where the directors of the company have chosen to follow this path. In the vast majority of cases, a company enters into CVL because it is insolvent. However, the strict legal definition is a voluntary liquidation in which the directors have not made a Statutory Declaration of Solvency. In very rare cases therefore, it is possible for a solvent company to be in CVL.

The insolvency legislation provides a mechanism whereby a company which is in administration may move from that process into a CVL. The mechanism is often used where there are likely to be several distributions to unsecured creditors. Whilst an Administrator is empowered to make distributions to unsecured creditors, he is obliged to apply to the court to do so. This adds to costs and where multiple applications may be necessary, moving into CVL is usually the cheaper option, since a liquidator has no obligation to apply to the court to make such distributions.

It is also a mechanism that is used where specific legal actions may be necessary to recover funds for the benefit of creditors, since certain legal actions, such as those relating to Wrongful Trading and Misfeasance can only be taken by a liquidator.

The process of placing a company into CVL is relatively straight forward. The directors must meet to formally resolve to place the company into CVL, and to convene meetings of the shareholders and creditors to put the process into place and appoint one of their number to chair those meetings. Because the resolution to wind up a company is a Special Resolution, the shareholders must be given fourteen days’ clear notice of the meeting to consider the resolution, unless the company’s Articles provide otherwise.

This notice entitlement can however be waived, subject to the appropriate majority of shareholders’ agreement. The company is also required to give creditors seven clear days’ notice of their meeting. Theoretically it is possible to have the meetings on separate days, provided the shareholders’ meeting is held first and the creditors’ meeting is held no more than fourteen days after the shareholders’ meeting has taken place. In practice however, both meetings are invariably held on the same day and the notices convening both meetings are issued simultaneously.

Between the date the directors resolve to place the company into liquidation and the shareholders’ meeting, commonly referred to as the hiatus period, the responsibilities and powers of the directors remain as they were.

Once the resolution to place the company into liquidation is passed by the shareholders, the director’s powers and duties cease and the liquidator takes control of the company and its assets.

During the hiatus period, the proposed liquidator will prepare a report on the statutory and trading history of the company and a statement of affairs, to be presented to the shareholders’ and creditors’ meetings. Whilst this report is prepared by the proposed liquidator, it is actually the report of the directors and their cooperation and input into its content is essential.

Whilst the directors retain their powers and duties during the hiatus period, it is important to note that during this period and indeed any period during which the company was insolvent, their duty of care is to the creditors. It is usual for the proposed liquidator to advise the directors on what they should and should not do during the hiatus period.

In the event that this advice is not followed, the directors risk action being taken against them personally, by the liquidator.

Following the Shareholders’ meeting, which is usually a formality, the creditors’ meeting is held. It is advisable for all directors to be present at this meeting. As has previously been mentioned, one of the directors will be the chairman of the meeting, but in practice the meeting is run by the liquidator who will present the report and statement of affairs, following which he will invite any creditors present to ask questions of the directors.

The purpose of this part of the meeting is for the creditors to satisfy themselves as to the reasons the company has failed and to add substance to the matters disclosed in the report.

Once questions are over, the meeting turns to the formal business, being the appointment of the liquidator, whether a liquidation committee should be formed and the basis upon which the liquidator is to be remunerated, including the basis upon which he may charge certain disbursements.

The creditors when voting, may confirm the appointment of the liquidator appointed by the shareholders, but they are also entitled to nominate an alternative, should they so wish. In the event there is more than one nomination, the matter is put to a vote. The value of creditors’ votes is based upon the amount of their respective claims. It follows that the nomination with the largest value of votes is duly appointed as liquidator.

Once appointed, the liquidator will realise the assets of the company, carry out such investigation as is required and ultimately will pay a distribution to creditors, if sufficient funds remain after the costs of liquidation have been met. In the event that the period of the administration of the liquidation exceeds on year, the liquidator must issue progress reports to the shareholders and creditors within two months of the date of each anniversary. Copies of these reports are filed at Companies House.

For more information please email us using the form on the “Contact us” page or call us on 01384 686 800 to talk things through or to arrange a free, initial, no obligation consultation.

When all matters have been resolved, the liquidator will convene final meetings of members and creditors, giving details of his acts and dealings throughout the period of the liquidation. Following these meetings, he will file a copy of his report at Companies House and three months later, the company will be dissolved.