We are living in unprecedented times and businesses of all sizes are already being hit hard by the spread of COVID-19 around the world. The Government tells us it is working on emergency plans to keep the economy going but there is a wide chasm between what businesses are being told and what help they are receiving.
It means that some businesses will not survive the turmoil and could be faced with closing their doors forever, which will be devastating for them and their employees. The best option for most insolvent companies is a process called a Creditors’ Voluntary Liquidation (CVL).
If your insolvent company needs to be liquidated and you care about your future business reputation it is far better to liquidate your company voluntarily via a CVL – as opposed to being forced into compulsory liquidation.
A company director can propose a CVL if their company cannot pay its debts, i.e. it is insolvent and the shareholders agree and pass a ‘winding-up resolution’, whereby a Licensed Insolvency Practitioner takes control of the company assets with the intention of either repaying creditors or distributing the money realised to shareholders.
Business owners need to understand that a CVL is not a Compulsory Liquidation – which occurs when a creditor attempts to force a company out of business in order to recover any debts owed to them.
Once a company does embark on a CVL it will stop trading and be wound up. A CVL is a formal recognition of your duties as a director to any of the company’s creditors.
Before liquidation proceedings can commence the company needs to have ceased to trade and the insolvency practitioner conducting the process must be in receipt of the following:
• Two forms of certified identity for each director and all shareholders who hold 25% or more shares
• Completed History and Information Gathering Questionnaire Completed Pension Questionnaire
• A full list of creditors, including name, address and amount outstanding
• A full list of employees who have been made redundant
• Copies of the last 3 years account, if applicable
The insolvency practitioner will prepare all the documentation that is required for the CVL process and will liaise with any required external parties (e.g. Royal Institution of Chartered Surveyors (RICS) valuers for valuing any company assets).
Dependant on the company’s Articles of Association, a company could be placed into liquidation within approximately 7-14 days. Two Meetings are required to do this: At the Board Meeting, the company directors formally resolve the company is insolvent and cannot continue to trade.
At the meeting…
At this meeting, the directors would also agree to appoint their chosen insolvency practitioner as the liquidator of the company, as well as agreeing for the necessary Meeting of Members to be summoned.
The Board Meeting is generally held at the director’s home or office and it is not essential to have an insolvency practitioner in attendance.
The Members’ Meeting is normally held approximately 14 days after the Board Meeting and can be convened at short notice, should the statutory percentage of members agree to this.
It is at this meeting that the company is formally placed into liquidation. The Members’ Meeting would usually be held at the insolvency practitioner’s offices and the company directors are required to attend.
The company’s Books and Records should be provided prior to this meeting, which would normally last no longer than 15 minutes, after which your company is now in formal voluntary liquidation.
Ratify the appointment of a liquidator While the company is in liquidation with a liquidator appointed once the Members’ Meeting has been held, the creditors still have to ratify the appointment of the liquidator.
New rules to be aware of
Due to the new Insolvency Rules, since April 2017 there is no longer a requirement to hold a Physical Meeting of Creditors to ratify the appointment of the liquidator.
The appointment can now be deemed as accepted unless sufficient creditors object to this. This is the “Deemed Consent Procedure”.
Alternatively, a “Virtual Meeting of Creditors” can be held where the creditors attend by conference call rather than in person. The insolvency practitioner will keep a register of any objections.
As soon as 10% of creditors who would be entitled to vote at a meeting object, then the deemed consent process automatically terminates and a physical meeting needs to take place.
It is also possible for creditors to requisition a physical meeting, but in order for one to be summoned, it must be explicitly requested by either:
• 10% of the total creditors (by value); or
• 10% of the total number of creditors; or
• 10 individual creditors
This is known as the ‘10/10/10 threshold’.
Once this ‘10/10/10 threshold’ has been met, or if sufficient objections to the Deemed Consent Procedure are received, then within three days a physical meeting will be convened and the directors notified that they will be required to attend the meeting.
While every effort will be made to ensure that it is held on the same day as the Members’ Meeting – for everyone’s convenience – that will not be possible if the request for a meeting or objections is received after the time of the Members’ Meeting.
It is to reduce the chances of that happening that we hold the Member’s Meeting in the late afternoon since creditors can object at any time prior to 23.59 hours that day.
Since the new Insolvency Rules were introduced, it is very rare that a Creditors’ Meeting is explicitly requested, although there are occasionally objections to the Deemed Consent Procedure.
Sign up to our newsletter to get the latest from Business Advice.