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Published on 21 December 2010 by Tony Groom

Creditors Voluntary Liquidation (CVL)

Creditors’ Voluntary Liquidation is a process by which the directors of an insolvent

company can close it down without involving a court procedure.

There are four tests of insolvency laid down in the Insolvency Act 1986 and any one

of the four tests can be used to determine whether the company is insolvent.

The tests are that the company has failed to pay a judgement debt, or deal with a

statutory demand, the cash flow test and the balance sheet test. The most common

is the cash flow test defined by whether or not the company can pay its liabilities on

time.

Insolvency does not necessarily mean that a company should be closed down, but

depends crucially on whether or not continuing to trade will enable the company to

emerge from insolvency and will improve the position for creditors. In addition to

trading out of the insolvency, there are a number of options, using formal and

informal restructuring procedures, for avoiding liquidation. These would normally be

incorporated in a rescue plan that would be developed by an insolvency

practitioner or rescue adviser.

If the company does continue to trade, the directors should seek professional advice

as they have a legal obligation to act in the best interests of the company’s creditors

and if it should turn out that the company eventually does have to be closed down

they will need documented proof of this. Failure to follow strict guidelines for trading

while insolvent can lead to the directors becoming personally liable for the

company’s debts if it does have to be closed down.

K2 Business Rescue The Emergency Service for Business

Call Tony Groom on 0844 8040 540

In the event that the directors conclude, with or without advice, that the company

should be closed, they can then use the formal process called Creditors Voluntary

Liquidation to wind up the company in an orderly fashion.

The CVL procedure is defined by the Insolvency Act 1986. It involves a board

meeting at which the directors formally agree that the company should cease to

trade. The next step is to seek shareholder consent. While this might be

straightforward for a very small company with shareholders consenting to a short

notice meeting, larger ones can be more complicated. At least 75% of the

shareholders must approve the directors’ proposal that the company be placed into

liquidation and at least 50% must approve the nominated liquidator. The

shareholders may however disagree and wish to appoint new directors to save the

company. In practice the directors normally sound out shareholders before

convening the meeting.

Documents must be prepared including Statutory Information on the company, a

history of the business, historical financial information of the company, deficiency

account, a statement of affairs and a list of creditors.

The directors must first have members’ (shareholders’) support for the closure so a

meeting has to be called in accordance with the company’s Memorandum and

Articles, which define the length of notice they must be given, usually 14 days.

At the meeting the members (shareholders) are asked to pass a resolution to close

the company by a vote of more than 75% and to appoint a properly licensed

liquidator to manage the process and ensure it is all carried out correctly.

A meeting of creditors is also convened under section 98 of the Insolvency Act 1986 –

this requires giving them at least seven days’ notice (excluding time for postage). The

creditors meeting involves confirmation of the nominated liquidator or appointing

the creditors’ own nominee who will need approval by at least 50% of the creditors.

All nominated liquidators must be licensed insolvency practitioners who have

provided consent to act. This consent must be available for inspection at the

meeting. In practice, such consent is normally only provided once the nominated

liquidator is satisfied about his/her fees. The creditors, at the meeting, may also

nominate a creditors committee that must comprise of three or five creditors

appointed by them to assist the liquidator and to represent them by overseeing the

conduct of the liquidation.

Preparation for meeting involves the directors producing a statement of affairs which

is a prescribed format document that shows asset realisations and any creditors who

have a claim over them. It makes assumptions about the value of realisations from

the sale of assets and includes all creditors, trade, HMRC, finance, employees and

contingent creditors that will crystallise due to termination of contracts. The directors

must also produce a history of events to explain the circumstances that led to the

company becoming insolvent.

K2 Business Rescue The Emergency Service for Business

Call Tony Groom on 0844 8040 540

Normally the directors would engage an insolvency practitioner or solicitor to help

guide them through the above process and administer the sending out of notices so

that the procedure is done correctly.

Following appointment the liquidator has a number of duties to perform. They must

deal with assets which are normally sold, they must access creditors’ claims and then

they must distribute surplus cash to creditors following a strict order of legal priority.

They also have a duty to investigate the accounts and activities of the company

and in particular look at the transactions prior to the company be placed into

liquidation. Having done this they report to the Insolvency Service on the conduct of

the directors with a view to pursuing them in the event of personal liabilities and

disqualifying them in the event of a failure to discharge their duties correctly.

The advantage of a CVL is that it is a very efficient procedure with the liquidator

taking over responsibility for dealing with creditors and closing down the company. It

also has the benefit of demonstrating that the directors were responsible in carrying

out their duties by them taking steps to close down the company in an orderly

manner when they believed it should cease to trade.

We are not Insolvency Practitioners. We operate within the law to protect our clients and their wealth. Our team has worked for over 20 years to help stabilise and return hundreds of businesses to profitable growth. Once appointed, Insolvency Practitioners do not work for you, they work for creditors and use your company’s assets to pay themselves. We work for you, not creditors.

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