A quick guide to creditors' voluntary liquidation

This quick guide to creditors’ voluntary liquidation includes guidance for creditors, employees and directors of a company in CVL.

What is creditors’ voluntary liquidation?

Creditors’ voluntary liquidation (CVL) is a procedure, instigated by an insolvent company, by which the assets of the insolvent company are sold, and the proceeds are distributed to the company’s creditors. At the end of the liquidation, the company is dissolved. The process is managed by a liquidator.

Usually, a company goes into CVL after its directors realise 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 (IA 1986) and the Insolvency Rules 1986 (SI 1986/1925) (IR 1986).

How does a company go into CVL?

A company goes into CVL if its members pass a special resolution for its winding up, with a majority of at least 75% (section 84, IA 1986 and section 283, Companies Act 2006). The members nominate an insolvency practitioner to act as liquidator. The liquidation is deemed to commence from the passing of the resolution (section 86, IA 1986).

After its members resolve to wind it up, the company convenes a meeting of its creditors (section 98, IA 1986) (section 98 meeting). The section 98 meeting usually takes place immediately after the members’ meeting at which the resolution was passed. The creditor’s meeting must take place within 14 days of the resolution to wind up the company. At the section 98 meeting, the creditors vote to appoint a liquidator (rule 4.63, IR 1986).

The liquidator

The liquidator must be a qualified insolvency practitioner. The liquidator is chosen by the creditors at the section 98 meeting; he may or may not be the members’ nominee. Until the section 98 meeting has taken place, the liquidator appointed by the members has only very limited powers, although additional powers may be exercised with the court’s sanction (section 166, IA 1986).

The liquidator has a duty to act in good faith, and to exercise his powers with reasonable care and skill, and for their proper purposes only.

What does the liquidator do?

A liquidator’s function is to collect in and realise the company’s assets, and to distribute the proceeds to the company’s creditors and, if there is a surplus, to its members (section 107, IA 1986).

A liquidator has wide-reaching powers that he may exercise to fulfil his functions. In a voluntary liquidation, the liquidator has power to continue the company’s business so far as he considers this is necessary for the beneficial winding up of the company (section 165 and Schedule 4, IA 1986).

Some other powers, such as bringing legal proceedings for wrongful trading or challenging antecedent transactions, may only be exercised if the liquidator first obtains sanction from the court or the company’s creditors.

Who pays the liquidator?

The liquidator’s fees are generally paid as an expense of the winding up. As such, they are typically paid out of the company’s assets, after secured creditors holding fixed charge security have been paid, but in priority to creditors who either have no security or have floating charge security over the company’s assets.

The rules relating to how liquidators’ fees may be fixed are set out in rules 4.127 to 4.131C of the IR 1986.

What does a CVL mean for a creditor of the company?

As a creditor, you will be invited to attend the section 98 meeting at which you may vote on the appointment of the liquidator (rule 4.53, IR 1986). This meeting also provides an opportunity to ask questions of the directors and proposed liquidator.

Claims by unsecured creditors are paid on a pari passu basis. As an unsecured creditor, you may receive a dividend paid pro rata at the end of the liquidation (and possibly also an interim dividend). In some cases, the dividend to unsecured creditors will be just a few pence in the pound, and it may be nothing at all.

If you have the benefit of security, you are entitled to be paid from the proceeds of sale of the secured assets, subject to certain exceptions.

As a creditor, you will be invited to provide the liquidator with details of your claim against the company (your proof of debt). The liquidator will then assess all the proofs of debt. He may either accept a claim in whole or part, or reject it.

There is no automatic stay on proceedings against a company in CVL. However, the court may order that any particular proceedings are stayed under its general, discretionary power in section 112(1) of the Insolvency Act.

You are entitled to receive reports on the progress of the liquidation from the liquidator (rules 4.49, 4.49C and 4.49D, IR 1986).

You may also form a liquidation committee with at least two other creditors (but no more than four), to help the liquidator fulfil his functions (section 101, IA 1986 and rule 4.153, IR 1986).

What does a CVL mean for an employee of the company?

In most cases, the business of the company ceases when, or shortly after, the company goes into CVL. All contracts of employment will then be terminated. However, if the liquidator carries on the business, he may retain some employees during the period of trading.

As a former employee, you may be entitled to a redundancy payment, and may have a claim for damages on the grounds of wrongful dismissal.

What does a CVL mean for a director of the company?

The directors must prepare a statement of affairs for the section 98 meeting, and one of the directors must chair the meeting.

When a company goes into CVL, the directors’ powers automatically cease, except so far as the company’s creditors sanction their continuance (section 103, IA 1986 and Measures Brothers Ltd v Measures [1910] 2 Ch 248).

The liquidator may report to the Secretary of State on a director (or shadow director) if he believes that the conditions for director’s disqualification are satisfied (section 7, Company Directors Disqualification Act 1986).

What can a creditor do if he thinks the liquidator is doing a bad job?

Creditors may be able to challenge the level of the liquidator’s remuneration under rule 4.131 of the Insolvency Rules.

The liquidator’s decision in relation to any proof of debt may be challenged by a creditor or a contributory (rule 4.83, IR 1986).

In extreme circumstances, a creditor may apply to court for an order removing the liquidator (section 108(2), IA 1986). Alternatively, a general meeting of creditors may resolve to remove him from office (section 171(2)(b), IA 1986 and rule 4.114, IR 1986).