The decision to commence a Creditors' Voluntary Liquidation (CVL) is one made by the directors/shareholders of a company. As a director/shareholder you control the timing of the CVL and also, you decide on the Insolvency Practitioner who is to assist the company to go into CVL and who is to be nominated as Liquidator by the shareholders.
Whilst the shareholders' nomination for Liquidator is subject to the agreement of creditors at the Creditors' Meeting, in the vast majority of cases the creditors accept the shareholders' nomination.
CVL is, however, terminal for the company. It ceases to trade and the Liquidator is left to dispose of the assets. The Liquidator's objective is to maximise realisations from the sale of assets, collection of debts etc. in order to pay a dividend to creditors, if at all possible.
In many cases, directors/shareholders are interested in trading again. Generally, there is nothing to prevent this. They can bid for and purchase the assets, subject to the Liquidator's agreement. They can set up and control a new limited company. Directors are not liable for the debts of the old company unless they have signed personal guarantees to that effect.
The Liquidator will also review the company's affairs with a view to reporting to the DTI on the conduct of the directors. This happens in every case. In instances where the insolvency is genuine and due to little or no fault of the management, then this report will do no more than indicate to the DTI who the directors are. At the other end of the scale, it can highlight offences which may lead to directors being disqualified from acting in that capacity in the future.
There are strict rules of priority as regards the order in which creditors are paid. In the event that a bank or other party holds a fixed and floating charge over the assets of the company (a debenture) then they will be entitled to realisations from "fixed charge assets" first.
These might be freehold property, fixed plant and machinery, goodwill and realisations from investments, for example.
Book debts used to be covered by a fixed charge but this is no longer the case. These realisations are now subject to the prior claims of preferential creditors.
On 15th September 2003 the corporate provisions of the Enterprise Act 2002 came into effect. They abolished the rights of the Inland Revenue and HM Customs and Excise to establish preferential claims. They rank with trade creditors for any dividends. The only preferential claims are now those from employees or the Redundancy Payments Office acting in their place, in respect of arrears of wages and holiday pay.
For floating charges created after 15th September 2003 the holders will have to give up a percentage of realisations to unsecured, non-preferential creditors. As these work through these provisions should mean that creditors as a whole are more likely to receive a dividend in insolvencies than was previously the case.
In all cases of insolvency, personal and corporate, employees, and in certain instances directors, can claim arrears of wages, holiday pay, redundancy and monies in lieu of notice from the Government, subject to statutory limits. The Redundancy Payments Office then takes the employees' place as a creditor. The Insolvency Practitioner concerned will be able to advise directly on these claims in specific circumstances.
This note provides a brief overview of the CVL procedure. For more information contact Ian Williamson at Campbell Crossley & Davis on 01253 349331.
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