Creditors Voluntary Liquidations
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, you decide on the Insolvency Practitioner who is to assist the company with the process of going 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, in the vast majority of cases the creditors accept the shareholders’ nomination. From 6 April 2017, creditors’ meetings will only take place if specifically requested by a certain value or number of creditors. It has been replaced by decision making procedures.
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 generally 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 Department for Business, Energy and Industrial Strategy (‘BEIS’) 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 BEIS 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. Examples of these are freehold property, fixed plant and machinery, goodwill and realisations from investments. Other assets, including book debts, are subject to the prior claims of preferential creditors.
On 15 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 on or after 15 September 2003 the holders have to give up a percentage of realisations to unsecured, non-preferential creditors (the Prescribed Part). This means that creditors as a whole are more likely to receive a dividend in insolvencies.
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 is meant as a brief overview of Creditors’ Voluntary Liquidations. It is not a detailed review and further detailed advice should be taken before coming to any decision. No responsibility can be accepted by Campbell Crossley and Davis, its partners or employees for any loss occasioned by any person or persons acting or refraining from action as a result of material contained in this note.