If a company cannot pay its debts, its directors may decide to put the company into liquidation.
Creditors’ Voluntary Liquidation offers directors a way to close their company voluntarily, rather than being forced to close under a winding up order.
What is Creditors Voluntary Liquidation (CVL)?
Liquidation is a legal process involving the appointment of a liquidator to wind up the affairs of a limited company.
Creditors Voluntary Liquidation (CVL) is one way of doing this. This is where a company cannot pay its debts and a decision is initiated by the director(s) to voluntarily bring the business to an end, subject to the approval of its shareholders.
That said, the CVL term is something of a misnomer since it is the shareholders who ultimately take the decision to liquidate and not the creditors.
The purpose of a CVL is to terminate a company’s operations and sell off its assets to discharge its debts, paying back creditors according to their assigned priority. Although this process is entered into on a voluntary basis, it is often only used when the business is beyond rescue and facing the possibility of a winding-up petition by its creditors.
For an insolvent company that has no viable future, a Creditors Voluntary Liquidation may be the best solution all round, allowing the directors to move on, and the creditors to recover as much money as possible from any realisable assets.
Voluntary liquidation, once initiated, will prevent the company from doing business, although the appointed liquidator can still realise the company assets and pay off any outstanding creditors. Upon completion of the liquidation, the details of the limited company will be removed from the Companies House register. The company will then cease to exist.
Creditors Voluntary Liquidation should not be confused with Members Voluntary Liquidation. This alternative type of liquidation is only an option for solvent companies, and is used when directors wish to extract funds in a tax-efficient manner before bringing the company to a close, for example, where the director(s) want to retire, the family business has run its course or where shareholders want to extract their investment.
What is insolvency?
Insolvency refers to where a company cannot pay its debts. There are two key tests to determine whether a company is insolvent: the cash flow test and the balance sheet test.
A company will be classed as cash-flow insolvent in circumstances where it is unable to meet its liabilities as and when they fall due. Balance sheet insolvent refers to where a company has outstanding liabilities that outweigh its assets.
Where your company is at risk of becoming insolvent, advice should be sought as soon as possible from an insolvency practitioner, as continuing to trade whilst knowingly insolvent could result in you being held personally liable.
An insolvency practitioner can help you to comply with your duties as the director of a potentially insolvent company, reducing any risk of wrongful trading or misfeasance. They should also be able to provide practical advice on any available rescue options. This could include, for example, going into administration or a company voluntary arrangement.
In circumstances where the company is beyond rescue, or it is the decision of the director(s) to cease trading, a Creditors Voluntary Liquidation may be the best course of action.
How do you liquidate a company voluntarily?
A sole director or board of directors can propose a company stops trading and be voluntarily liquidated in circumstances where:
- The company is insolvent, ie; it cannot pay its debts, and
- Enough shareholders agree to this course of action.
A Creditors Voluntary Liquidation will require a meeting of the shareholders and creditors to pass appropriate resolutions and appoint a liquidator. To obtain the shareholders’ agreement, a general meeting must be called where they are asked to vote. To be able to proceed, at least 75% of shareholders, by value of shares, must resolve to wind the company up.
A meeting of creditors will usually be called on the same day as the shareholders meeting, at which they will receive details of its financial affairs. The creditors can nominate a liquidator and their nomination will usually override that of the shareholders, if different.
The following three steps must then be followed:
- Appoint an authorised insolvency practitioner to take charge of liquidating the company.
- Send the winding-up resolution to Companies House within 15 days.
- Advertise the winding-up resolution in the London Gazette within 14 days.
How are compulsory and voluntary liquidation different?
Voluntary liquidation is a company decision and not one forced upon by the court. In contrast, compulsory liquidation is when the court makes an order for the insolvent company to be wound up on the petition of an appropriate person.
The director(s) of a company can apply directly to the courts to liquidate it, although compulsory liquidation is typically initiated by disgruntled creditors.
Once a winding-up petition has been approved by the court, it will appoint an Official Receiver to manage the liquidation process. This will involve freezing bank accounts and investigating what led to the company’s insolvency.
The Official Receiver is also under a duty to conduct an investigation into the company directors’ conduct. This is regardless of whether or not there is any evidence of wrongdoing.
One of the primary advantages to opting for Creditors Voluntary Liquidation, is rather than waiting to be compulsorily wound up the company can nominate an insolvency practitioner. Neither the Official Receiver or the court are part of voluntary liquidation.
By opting for voluntary liquidation, you will retain more control over the process, and the company will be closed down in a more orderly and timely manner. This can help if the directors are looking to create a phoenix company or start over in the same industry. Further, should there be investigations into directorial conduct, a voluntary decision to wind up the company will demonstrate that the directors have taken a proactive role in fulfilling their obligations to any outstanding creditors.
How to make a direct liquidation application to the court
A sole director, or all the directors jointly, can ask a court to order the company to stop trading and be liquidated. To apply directly to the court, you will need to complete a winding-up petition using form Comp 1, as well as form Comp 2 confirming the details of your petition. You will also need to provide a winding-up resolution from the shareholders.
The amount of paid-up share capital the company has will determine where you need to send your application. This can be located on the Companies House register. If your paid-up share capital is £120,000 or more, you can submit your petition online to the High Court. If your paid-up share capital is less than £120,000, you will need to locate your nearest court that deals with bankruptcy. This may need to be submitted online or by post.
After you apply, and if the court accepts your petition, you will be given a date for the hearing. Prior to the court hearing taking place, you must serve a copy of the petition on your company, completing a certificate of service to let the court know that you have done this. You must also place an advert in the London Gazette at least 7 days before the hearing. A copy of both the certificate of service and the advert must be sent to the court.
At the hearing, either you and/or a solicitor on your behalf must be in attendance, although you will not be required to give any evidence. If the court grants a winding-up order, an Official Receiver will be put in charge of the liquidation. A copy of the winding-up order will be sent to your company’s registered office and the Official Receiver will start liquidating your company.
How do you access the company bank account?
Where a petition is filed to wind up a company, the company’s bank account will be frozen and you will need a validation order to access it. To apply for a validation order, you will need to complete and submit Form IAA to the Companies Court, together with a witness statement. You will also need to inform the person who filed the winding-up petition that you are applying for a validation order and in which court, usually the Companies Court.
How do you arrange liquidation with creditors?
If you opt for Creditors Voluntary Liquidation, contrary to popular belief, it is the shareholders and not the creditors that resolve to wind up the company. However, there must still be a meeting of the creditors to pass appropriate resolutions. As with the shareholders meeting, the creditors must be given an estimated statement of affairs of the company, together with a report summarising its financial position.
The creditors will be given the opportunity to ask questions about the trading activities of the company and to express any areas of concern they would like the liquidator to investigate. The meeting is concluded once the necessary resolutions have been passed, including the appointment of a liquidator to manage the process going forward.
What is the role of the liquidator?
As soon as the liquidator is appointed, they will take control of the company’s affairs. As part of managing the liquidation process, they will be responsible for various matters, including:
- Settling any outstanding contracts, including employee contracts
- Settling any legal disputes
- Collecting in money owed to the company
- Selling off the company’s assets
- Distributing any money to pay outstanding creditors in order of priority
- Returning share capital to the shareholders, if any, once all debts have been repaid
- Keeping creditors informed and involving them in decisions where necessary
- Meeting deadlines for paperwork and keeping authorities informed
- Paying liquidation costs and the final VAT bill
- Investigating the cause of the winding up and any actions taken by the director(s)
- Interviewing the director(s) and reporting on what went wrong in the business
- Having the company removed from the companies register upon completion of the CVL.
Once the company is removed from the register held at Companies House, it will be dissolved. Any company liabilities which remain unpaid by the company will be written off, unless they were personally guaranteed by the director(s).
What is the impact of liquidation on directors?
Once a liquidator has been appointed, the role and responsibilities of the director(s) will change, and almost all of their powers will cease. They will no longer have control of the company or anything it owns, nor can they act for, or on behalf, of the company.
If you are a director, you must provide any information about the company that is requested by the liquidator and attend interviews as and when is reasonably required. You must also hand over the company’s assets, records and paperwork.
It is important to remember that the liquidator is required to investigate any actions taken by the director(s). If it is found that you did not fulfil your fiduciary duties while knowingly insolvent, or if you put your own or other members interests before those of creditors, you could be found guilty of wrongful or fraudulent trading, or misfeasance.
This could result in you being held personally liable for some or all of the company’s debts. If the liquidator concludes that your conduct was unfit, you could also be disqualified from acting as the director of any company for up to 15 years, or even be liable to prosecution.
What is voluntary liquidation of a company?
Voluntary liquidation is where a company cannot pay its debts, ie; it is insolvent, and a decision is initiated by the directors to voluntarily bring the business to an end, subject to the approval of its shareholders by a 75% majority vote.
What is the difference between liquidation and voluntary liquidation?
Liquidation is a legal process in which a liquidator is appointed to wind up the affairs of a limited company. This can be done on either a voluntary or compulsory basis. A compulsory liquidation is where the court approves a winding-up petition, typically presented by disgruntled creditors, and appoints an Official Receiver.
How long does voluntary liquidation take?
Putting a company into Creditors Voluntary Liquidation is a fairly swift process, usually taking up to 14 days. The liquidation process which follows, in which a licensed insolvency practitioner will sell off the company assets, is likely to take considerably longer, although the timeframes will depend on the size of the company and the nature of the assets involved.
How do you voluntarily liquidate a company?
Voluntarily liquidating a company requires the agreement of the board of directors, together with the shareholders’ approval. A general meeting must be convened, where shareholders are asked to vote. To be able to proceed, at least 75% of shareholders, by value of shares, must resolve to wind the company up. This is known as a winding up resolution.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.