Creditors’ Voluntary Liquidation

Creditors’ Voluntary Liquidation (CVL) is probably the most common procedure, instigated by an insolvent company, by which the assets of the company are realised, and any surplus distributed to the company’s creditors, after the liquidation costs. Following the completion of the liquidation, the company is dissolved.

A company normally goes into CVL after its directors determine that its liabilities exceed its assets or it cannot pay its debts as they fall due and so the company cannot carry on its business.

The procedure is set out in the Insolvency Act 1986 (IA86) and the Insolvency (England and Wales) Rules 2016 (IR2016) and differs from a compulsory liquidation as it does not involve the Court or the Official Receiver.

A company goes into CVL if its members pass a special resolution for its winding up, with a majority voting of at least 75% of voting members. The members also pass an ordinary resolution (50%) appointing an Insolvency Practitioner to act as Liquidator. The liquidation is deemed to commence from the passing of the resolution. After its members resolve to wind the company up the company’s creditors may nominate an alternative person to be the Liquidator.

From April 6th 2017 there has no longer been the requirement to have a physical meeting of creditors to appoint a Liquidator.

The directors must deliver a notice to creditors seeking their decision on the nomination of the Liquidator under section 100 of the IA 1986 and rule 6.14 of the IR 2016 by the deemed consent procedure or by a virtual meeting of creditors. The notice must contain the information required in rule 6.14(8) of the IR 2016 and rules 15.7 (deemed consent) and 15.8 (notices to creditors of decision procedure) of the IR 2016.

Introduced on the 6th April 2017 the deemed consent procedure is a process by which an insolvency office-holder can seek a decision by creditors in insolvency proceedings which does not require creditors to vote on the proposed decision. For a company the law on the deemed consent procedure is section 264ZF IA16 and paragraph 15 of the IR2016.

The directors of the company must prepare a Statement of Affairs within 7 days prior to the day of the members’ resolution (the decision date) and deliver a copy of the Statement to the company’s creditors (IR 2016) no later than the business day before the decision date.

Creditors may also request a physical meeting of creditors under section 246ZE of the IA 1986 in accordance with rule 15.6. To do so there must be at least 10 creditors requesting such a meeting, or 10% in number of creditors or 10% in value of creditors (the so-called ‘rule of 10’).

The Liquidator’s function is to realise the company’s assets and if there are sufficient funds available after the costs of the liquidation then to pay such monies to creditors in accordance with statutory rankings for distribution.

Schedule 4 to the IA86 discloses a list of statutory powers that a Liquidator can exercise to fulfil his duties.

The Liquidator in a CVL has to furnish information to the Insolvency Service in the form of an online report on the conduct of the directors at the company.

The Liquidator’s fees are paid as an expense of the winding up. The rules as to how the Liquidator’s remuneration may be fixed are set in the IR2016 (Paragraph 18).

Creditors are required to be provided with reports on the progress of the liquidation with the first progress report required to be issued by the Liquidator after 12 months and annually thereafter until the Liquidator submits a final report to the creditors to conclude the liquidation. If the liquidation does not exceed 12 months then only a final report will be submitted to the creditors.

A company may go into a CVL as an exit from an administration in certain circumstances.

Creditors may form a Liquidation Committee of 3 to 5 creditors to assist the liquidator in carrying out his functions and fix the basis of the liquidator’s remuneration.

A company in a members’ voluntary liquidation (MVL) can be placed into CVL by the MVL Liquidator converting the MVL to a CVL where the Liquidator forms the opinion that creditors will not be paid in full.

A limited liability partnership (LLP) can also be placed into a CVL.

Further information on CVLs can be obtained from the website of the Association of Business Recovery Professionals (R3) at www.r3.org.uk.