A filing cabinet with insolvency documents inside

What is a CVL (Creditors’ Voluntary Liquidation)?

When a company has reached a position at which it can no longer pay outstanding arrears it is officially regarded as ‘Insolvent’. At this stage company Directors must assess their position and proceed with the most appropriate action, considering the best interests of all remaining creditors. The best answer is often to initiate a Creditors’ Voluntary Liquidation (CVL). 

This enables the Directors to act before creditors pursue legal action and a Compulsory Liquidation, giving them the benefit of extended control within the process which they otherwise forfeit.

What can I Expect?

Phase 1: Appointing an IP (Insolvency Practitioner)

In all Liquidation processes an IP must be appointed, it is illegal for a company to pursue Liquidation without one. In the case of a CVL, the shareholders or Directors will appoint a licenced professional to oversee proceedings in the first instance.

The appointment process is incredibly straight-forward and can be done in a couple of hours at the most. The catch is all creditors (majority 75%) must approve this IP before proceedings can commence. This approval typically takes place within the ‘Creditors’ Meeting’ which can be several weeks after the company has appointed the IP and had a consultation.

Phase 2: Directors’ Meeting

This is a step that can be taken straight away, dependent on the size of the company and the number of appointed Directors. During this meeting the Directors must all agree and confirm that the company is insolvent, and Liquidation is the appropriate method of settling outstanding debts.

Phase 3: Consent to Short Notice

In order to initiate an immediate shareholder meeting the shareholders must sign a ‘Consent to Short Notice’. This process is only viable if a majority (90%+) of all shareholders agree to sign, should this majority not be met then a notice period of 14 days (minimum) must be given prior to any shareholder meetings.

Phase 4: Shareholder(s) Meeting

This is a meeting in which the shareholders agree to the Voluntary Liquidation and vote in agreement or otherwise of the IP/Liquidator appointed by the Director(s).

This meeting is usually held on the same day as following Creditors Meetings, allowing for proceedings to get underway faster and maximise time efficiency.

Phase 5: Creditors’ Meeting

Immediately after the Shareholder(s) meeting the remaining Creditors’ must have a meeting of their own. During this meeting all creditors will be verified, and the IP/Liquidator will carry out checks on various forms, statements and documentation.

Ahead of the meeting, a minimum of 7 days-notice must be given to all Creditors in order for them to prepare the documents necessary. Although in most cases where good practice is observed this notice period ranges from 2 – 4 weeks.

Final Phase: Liquidation

Once all of the above stages are complete, the Liquidation process can proceed.

There is no one time limit for Liquidation proceedings, due to the variation between cases and their circumstances. However, the average timeframe is between 2 to 4 months for the majority of Liquidation cases.

If a company finds itself involved in a more complicated case with more variables, this process can take as long as a year or two from start to finish, in rare cases.

Selecting a Liquidator

Prior to approaching an IP to enlist their services, the Director must obtain majority approval from all the company shareholders, otherwise Voluntary Liquidation cannot proceed.

Only after this agreement can a Liquidator be selected but must be approved by 90% of shareholders in order to be appointed to the case. If rejecting an IP for appointment, shareholders may propose a Liquidator of their own for approval by the remaining shareholders.

It is important that company Directors seek the services of a licensed, trusted and reputable IP as they remain responsible for acting in the best interest of both the company and its creditors. If a Director selects an IP in an attempt to manipulate the situation or makes a poor judgement, they will be deemed to have acted inappropriately.

Once in office, the Liquidator is given powers over the company, its assets and any bank accounts related to the company. Amongst their responsibilities Liquidators are responsible for assessing the course of action taken by Directors leading up to Insolvency. This includes pursuing any cases of wrongful trading if there is sufficient evidence to indicate they have acted inappropriately.

How much does CVL cost?

Concerns around the cost of a CVL are common, understandably. Given the Directors’ responsibility to act in the best interest of the company, once in a difficult financial state costing extra services can cause further concern and worry to Directors.

As with predicting timeframes, predicting cost is difficult as the variables of each case will affect the cost of Liquidating a company. However, there are controls put in place to ensure that costs follow specific boundaries. Creditors’ Committees, courts and even laws all have the powers to control some elements involved in the cost of a CVL. It is likely that most cases will benefit from at least one of these controls. 

The nature of assets within a company can also influence sudden costs outside any negotiated fees. This is typically assets break away from the norm including such assets as livestock, etc.

Other variable factors which are likely to affect cost are:

  • The amount of time spent by Liquidators and their teams
  • Complexity and complications
  • Level of excess responsibility for Liquidators and their teams

How do IP’s get paid?

Any fees are usually calculated as a fixed % of asset revenue or on an hourly/weekly /monthly rate.

During the Liquidation process, Liquidator fees are usually factored into the sale of assets and the distribution of these, regarding IPs as creditors to the company. Although categorised as a creditor the IP is only paid once all secured creditors are paid.

Creditors’ Rights and Responsibilities:

Creditors rights during the CVL process mirror their responsibilities, for the most part.

Although they are not able to initiate a CVL, shareholders have access to the financial history leading up to Liquidation, any claims made from all outstanding creditors, summaries of Creditors’ Meetings and are able to access information and ask questions throughout the process.

When addressing their responsibilities, the majority of these involve interaction and engagement with the documents listed above, which they have both the right and responsibility to access.

They must vote to approve or reject any IP proposed by the Company Directors and have the power to propose Liquidators of their own, should Director proposals be rejected. If Creditors cannot or wish not to attend the meeting of Creditors, they have the ability to use a Proxy vote and full report of the meeting will be sent to creditors not in attendance within 28 days.

What will happen to Directors?

It is important for Directors to recognise that once a Liquidator has commenced the Liquidation process, all of their actions and conduct (business related) in the period leading up to and including Insolvency will be reviewed.

If there is sufficient evidence that indicates one or more Directors did not act in the best interest of the company and its creditors, they may face charges of wrongful trading. If this happens there is a severe and serious risk that these parties will be held personally liable for resolving the outstanding company debts, in full or in part.

For this reason, it is important that Directors address any concerns head on, no matter how small. Contacting an IP or Business Recovery Specialist gives the Directors access to the right information to take pro-active action in addressing outstanding debts, in a responsible and appropriate manner.

If you feel your company may be at risk of Insolvency and aren’t sure what to do, get in touch. Our team are available for no obligation consultations which arm you with the information you need to make an informed and appropriate decisions.