Creditors Voluntary Liquidation Explained

Creditors Voluntary Liquidation Explained

Liquidating a company can take two main forms; voluntary or compulsory.

A compulsory liquidation happens when a creditor applies to the High Court for a winding up order. If the petition is granted then the Official Receiver takes control of the process and liquidates any assets for the benefit of the creditors as a whole.

The voluntary form again takes two routes.

If the company is insolvent then the directors may apply for a Creditors Voluntary Liquidation (CVL).

Where the firm does have the resources to pay its debts then the process is called a ‘Members Voluntary Liquidation’ (MVL).

Companies that suffer a downturn in trade, such as the loss of a major customer may find themselves in a position where to continue to trade would prove to be illegal. In this case they may choose to petition the court for a CVL.

Trading whilst insolvent and where there is no prospect of creditors being paid would fall within the purview of wrongful trading and is a serious offence for company directors.

The first step is for the directors to call a members meeting. This is for the purpose of examining the position and passing a resolution to liquidate the company. The members will also be required to nominate a liquidator at this point and to resolve to cease trading.

Once the resolution is passed the company is officially in liquidation however the liquidator is only allowed to sell off perishable goods and secure the premises and any assets. The liquidators’ position only becomes official once ratified by the Creditors meeting.

Following the members meeting the directors are required to call a creditors meeting. The creditors need to be informed of the state of affairs of the company and will need to choose a liquidator. Generally speaking this will be the members’ nominated liquidator.

There are a series of specific requirements around the holding of a creditors meeting that directors must abide by and a good liquidator or insolvency practitioner will help guide you through this. The requirements include;

  • every known creditor must be given at least seven days’ notice by post
  • the notice must be advertised in the London Gazette and two newspapers local to the company’s principal place of business in the previous six months
  • the notice is required to give the name and address of an insolvency practitioner who will supply information on the company’s affairs free of charge, or an address where a list of the names and addresses of the company’s creditors will be available for inspection free of charge two business days before the meeting
  • the directors must prepare a statement of the company’s affairs, swear it and present it to the meeting of creditors
  • one of the directors must preside at the meeting
  • the liquidator nominated by the members must attend the creditors’ meeting and report on any powers exercised since the members’ meeting

The creditors are allowed to ask questions on any matter that needs clarification and will need to pass a resolution to appoint the liquidator.

The creditors may also choose to appoint a liquidation committee to oversee the progress of the process and assist the liquidator where needed.

Once appointed the liquidator takes full control of the business which should by this point not be trading. They will make a full inventory of the assets of the firm and go about the work of realising cash from these.

The liquidator may choose to sell through trade sales or an auction but will need to balance the need for a speedy resolution with the requirement to realise as much cash for the creditors as is possible.

The liquidator will also provide a report into the conduct of the directors and recommend whether any further action is required.

Once the assets have been sold off then the liquidator will pay the creditors a dividend but in the order of seniority. This means that secured creditors will take preference over unsecured.

Finally the company will be struck off the companies house register, thus ending the life of the firm.

Company directors need to be aware that a CVL or MVL are only two of the options available for companies in trouble. Executives should take full professional and qualified advice from an insolvency professional before choosing one route or another as there may be a more applicable solution for their company.

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