A creditors’ voluntary liquidation (CVL) is a procedure in which the company's directors choose to voluntarily bring the business to an end by appointing a liquidator (who must be a licensed insolvency practitioner) to liquidate all of its assets. This differs from a compulsory liquidation, which is forced upon an insolvent company via a winding up order made by the Court. The following 4-step guide describes how a creditors’ voluntary liquidation works and how it affects the company and its directors:
First, the directors of the company contact an insolvency practitioner who will most likely be appointed as the liquidator during the creditors’ meeting. During the initial consultation the insolvency practitioner will ask a few basic questions in an effort to determine whether a CVL is the most ideal option for the company. Of course, if the directors have the intent of ending the company, liquidation will be the best course of action.
If the directors are interested in the possibility of keeping the company in business, but are concerned that there is no way to escape insolvency and repay outstanding debts, the insolvency practitioner may introduce them to a couple of alternate options, including Company Voluntary Arrangement (CVA) and pre-pack administration.
A CVA is a formal payment plan that the insolvency practitioner drafts and the company then proposes to its creditors in an effort to reach an formal agreement. If successful, the CVA will make it much easier for the insolvent company to recover from its debts without being would up.
When being quoted low fees for liquidations, the saying that comes to my mind is “If it looks too good to be true, then it usually is” please be careful as the outcome may not be what you had hoped for.
A pre-pack administration would involve the company selling all or some of its assets in order to raise the funds needed to repay some of the creditors (with secured creditors taking priority). The sale of assets is prearranged before an administrator is appointed so the entire process is streamlined and the business does not need to cease operating. In fact, the directors of the insolvent company can even form a new company that would then buy the assets from the old company, allowing the insolvent business to begin operating as a new company free of debts.
If the insolvency practitioner and directors come to the conclusion that a CVL is the preferred course of action then a creditors’ meeting will be held about 3-4 weeks after the company ceases trading, during which the appointment of the liquidator will be formally confirmed. Usually the liquidator will be the insolvency practitioner that has been engaged by the company's directors. However, in rare instances if a bank is one of the company’s major creditors they may insist that the liquidator be selected from their own panel of approved liquidators. In practice, it is not uncommon for there to be no creditors actually present at this meeting, making it a mere formality. At this meeting a Statement of Affairs will be presented, which will have been prepared by the insolvency practitioner, and will simply state the current financial status of the company and details about the liquidation.
During the liquidation of the company the insolvency practitioner (liquidator) will continue to liaise with creditors, resolve any issues related to creditor claims, and take the appropriate actions necessary to sell the company’s assets. The liquidator will also commence collection of any outstanding book debts, handle employee claims, and issue the necessary reports to government agencies.
Obviously, the company will cease to exist after liquidation, but what about the directors? During liquidation the liquidator is required to investigate any actions taken by the directors during the time the business was insolvent. If it is found that they did not fulfil their fiduciary duties while trading insolvently, they may be found guilty of wrongful trading. This could result in the directors being held personally liable for some or all of the company’s debts, and they may be banned from acting as the director of any company for a period of upto 15 years.
You may also wish to read up further about members voluntary liquidation otherwise known as a MVL
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