Company Voluntary Liquidation (CVL)

A company is an artificial legal entity. It cannot live and it cannot die. Its effective birth is registration and its effective death is dissolution. Liquidation is simply the process by which a company's assets are realised and distributed to those parties legally entitled to them, so that it can be dissolved. A Voluntary Liquidation is one which has been instigated by the passing of a resolution by the shareholders, as opposed to a winding up order made by the court, generally at the behest of an unpaid creditor. A Creditors Voluntary Liquidation is a voluntary liquidation where the directors cannot make the Statutory Declaration of Solvency necessary for a Member's Voluntary Liquidation i.e. It is insolvent, in that it will be unable to pay its debts in full.

The process is started by the directors holding a board meeting and recognising that the company is insolvent and ought to be placed into liquidation. A meeting of shareholders is convened to pass an extraordinary resolution to place the company into liquidation and to appoint a Liquidator. By law, this meeting requires 14 days notice. However, if the holders of 95% of the issued share capital all agree to accept less than the statutory notice the notice period can be waived and the company placed into liquidation immediately. This would normally be necessary if there were a need for a Liquidator to take control of the assets straight away to protect them, for example, from an unpaid creditor.

At the same time, a notice convening a meeting under Section 98 Insolvency Act 1986 is sent to all creditors. The creditors meeting will be held generally immediately after the shareholders meeting (unless this was held at short notice). A director must be present at the creditors meeting, and preside as chairman. The Liquidator appointed by the shareholders must also attend the meeting.

Whilst the director is chairman of the meeting, to all intents and purposes the meeting is run by the proposed Liquidator. He will read through the Statement of Affairs (effectively a document showing the assets and liabilities of the company at realisable values rather than book values) which must be sworn by a director and a number of other ancillary documents to provide information to the creditors. After that, the meeting will be opened to questions from the creditors. Generally, questions about the documentation provided will be handled by the proposed Liquidator whilst questions concerning the company's history will be dealt with by the chairman.

Once questions have finished (there is no statutory time limit on the length of time allowed for this) a vote is then taken on the appointment of the Liquidator. Whilst the shareholders may have appointed the Liquidator, in an insolvent liquidation it is the creditors who stand to lose or gain by the Liquidator's actions, and hence they have the final say. If they wish, they can nominate an alternative Liquidator, and whoever receives the most votes in value (i.e. By simple majority) is duly appointed. In the overwhelming majority of cases, the creditors choose not to propose an alternative Liquidator.

Further, creditors can appoint a Liquidation Committee (minimum 3 members, maximum 5) who assist the Liquidator in determining matters of policy and with whom the Liquidator can consult on matters of importance. Shareholders can also be represented on this committee but against a backdrop of an insolvency this is not normally recommended. Committees are nowadays only found, as a rule, on larger and contentious cases.

It is vital that, in the period between the calling of these meetings and actually holding them, the directors (who remain in control of the company) exercise appropriate caution and take the advice of the proposed Liquidator. There is no embargo on continued trading, although the company cannot accept deliveries of goods for which it has not made provision for payment. It is necessary, during this period, not to improve or worsen the position of any individual creditors, or to dissipate any of the assets, otherwise the directors could have either personal liability or be culpable for misfeasance. In particular, it is vital to ensure that assets that ought to be made available to the Liquidator do not fall into the hands of creditors and thus become available for set off. As an example all cheques received should be handed to the proposed Liquidator and not paid into an overdrawn bank account. Because of all the risks involved, it is usually safest for the company to cease to trade immediately, and for effective control to be handed to the proposed Liquidator.

The Liquidators primary duties are as follows:

• The realisation of the assets to best effect. This is the Liquidator's overriding responsibility, and the majority of decisions he takes are to be taken with this in mind. For example, he takes a major risk if he disposes of the assets on credit and does not get paid. It is perfectly legal for the assets to be sold to a party connected with the company, although if he does so he should notify the creditors accordingly. In view of this overriding obligation, it is generally necessary to obtain a professional valuation of all the assets, particularly if they are to be sold to a connected party. The definition of "assets" is wide, and includes rights of action against third parties, and the potential unravelling of transactions which have already taken place and are considered to be not in the interest of the company.

• The agreement of creditors claims.

• Payment of dividends to the creditors in accordance with their legal rights. Preferential claims have to be paid in full before any funds are paid to ordinary (or non preferential) creditors. Where there are insufficient funds to pay any particular class of creditors in full, he has to make a distribution on a pari passu basis. This is to say that all creditors of a particular class should receive an equal percentage of their claim.

• To comply with a plethora of statutory requirements. These are too numerous to fully list but include the convening of annual meetings of members and creditors, where it is too soon to close the liquidation. Once the liquidation is ready for closure, and all assets have been distributed, he must convene final meetings of members and creditors. Three months after his report of the meetings has been forwarded to Companies House, the company is deemed to be dissolved by operation of law.

• No later than six months after his appointment the Liquidator must file a report with the Secretary of State on the conduct of the directors. In this report he must identify any areas of their conduct which, in his opinion, render one or more of them unfit to be concerned in the management of a limited liability company. An adverse report can result in a director being disqualified from holding office for a period of anything between 2 and 15 years.

• From the date of his appointment, the powers of the directors cease and pass to the Liquidator. Responsibility for filing accounts also then rests with the Liquidator, these are in a different form to those normally filed by the company. The Liquidator's appointment means the directors no longer have to file accounts or annual returns, but does not negate any penalties which have already been incurred for default in that respect.

Other than the passing of the directors powers to the Liquidator, and the directors having a duty to assist the Liquidator in his functions, there are few direct consequences which arise simply as a result of putting the company into liquidation. Any guarantees given by the directors of any of the company's debts will, most likely, be immediately crystallised upon liquidation.

Whilst there may be a perceived stigma associated with an insolvent liquidation, the practical impact of the liquidation depends largely upon the circumstances of the particular case, and the manner in which the directors have approached their fiduciary duties towards the company, and whether they have continued the company's operations to the detriment of the creditors. The major areas to be considered by the Liquidator are as follows:

• Preferences. This is where a creditor has had his position improved in the time leading up to the liquidation simply because the directors wished to achieve that effect.

• Fraudulent Trading. This is where it can be demonstrated that the business of the company has been continued with a view to defrauding the creditors. This is also a criminal offence. As can be anticipated, this carries a very high burden of proof for the Liquidator who effectively has to prove "the criminal mind". This has invariably been a very difficult area for Liquidators to succeed in.

• Wrongful Trading. This is where a point is reached where the directors knew or ought to have known that the company could not realistically avoid insolvent liquidation. If the directors then fail to take steps to place the company into liquidation, instead continuing the business and worsening the position, then they can be held liable to make a contribution to the assets of the company, commensurate with the further losses incurred. There are defences, such as implementing a rescue package in conjunction with professional advice. However, it therefore follows that as soon as the directors ascertain that a company is insolvent (defined as "unable to pay its debts when they fall due" or "its assets are less than its liabilities, including contingent liabilities") they must be seen to take professional advice and to act in accordance with it. As and when it becomes clear that the company cannot avoid an insolvent liquidation, they must take steps to place the company into liquidation.

We trust that this brief insight into the concept of Creditors Voluntary Liquidations and their impact is useful. It is non-exhaustive, by necessity, to attempt to do otherwise requires a book. The comments on specific areas do not constitute formal advice, and thus cannot be relied upon as a definitive statement of the law. If you have any queries or would like us to expand on any matters, please contact your nearest Unity Office.