Voluntary Liquidation the process by which the directors of a company close the company down

Creditors Voluntary Liquidation (CVL) – What is a Creditors Voluntary Liquidation?

A company may go into Creditors Voluntary Liquidation when it cannot pay its debts. The directors and or shareholders decide to put the company into liquidation due to the fact it is insolvent. In doing this a licensed Insolvency Practitioner is appointed as the Liquidator of the company whose prime duty is to collect in the assets of the company and distribute them to the company’s creditors.

The Liquidator will also look into the conduct of the company directors to ensure that they have acted properly.

When is Creditors Voluntary Liquidation Appropriate?

With creditors voluntary liquidation the company will cease to trade, the assets are realised and employees dismissed. Where it may be possible to trade out of the situation, other insolvency procedures such as Company Voluntary Arrangement or Administration may be more appropriate.

It is for this reason that directors should seek advice from a licensed Insolvency Practitioner who can guide them through the options. Creditors voluntary liquidation will be appropriate where:

• The company is insolvent (can’t pay its debts as and when they fall due);
• The company’s business is no longer viable;
• The directors are not prepared to continue to trade the company;

How is a Creditors Voluntary Liquidation Undertaken?

To undertake a Creditors Voluntary Liquidation, the company must pass a special resolution to say that it cannot continue in business because of its liabilities and that it is advisable to wind up. Then 75% of the companies shareholders must vote to place the company into liquidation.

What will happen in a Creditors Voluntary Liquidation?

A liquidator will be appointed by either the Directors or the Creditors of the company. The directors must provide him or her with a statement of the company’s affairs and must co-operate fully with the liquidator.

Within 14 days of being appointed, a liquidator must publish a notice of appointment in the Gazette and notify the Registrar.

The Liquidator will start to wind up the company’s affairs. They will do this by selling all the company’s assets and distributing them to its creditors. If anything is left over, the liquidator distributes it among the shareholders of the company.

What happens when the company’s affairs are fully wound up?

The liquidator presents an account of the affairs of the company and how assets have been distributed to a final meeting of the creditors and members of the company. He or she must advertise the meeting in the Gazette at least one month before it is held.

Within one week of the meeting having taken place, the liquidator must send the account to the Registrar and a return of the final meeting. Unless the court makes an order deferring the dissolution of the company, it is dissolved 3 months after the return and account are registered at Companies House.

What happens to employees in a Creditors Voluntary Liquidation?

As the purpose of the liquidator is to wind up the company the most likely outcome is that the liquidator will terminate employment contracts on or shortly after his appointment.

The question is if employees are owed money (i.e. wages due) will they be paid? Certain amounts are recoverable from the National Insurance Fund (NIF), but these payments are very limited. Employees, who are owed more than they are able to claim from NIF, will rank as preferential creditors, which means they will be paid after payment of the insolvency’s expenses but subject to a maximum of £800. Any balance owed will be treated as unsecured debt in the same way as the company’s trade creditors, and it is unlikely that employees will recover more than a small proportion of what they are owed.