When a company is no longer viable, the simplest and quickest route to placing it into liquidation is by way of a CVL.  This generally allows directors to maintain control, until a liquidator is appointed, and to nominate their choice of insolvency practitioner to oversee the process and to accept appointment as liquidator.

The process has to be paid for by the company, or if it has no funds by the directors or shareholders, and as it requires a special resolution of the company, agreement of shareholders is required.  However, it is generally quicker than allowing the company to be placed into liquidation by court order (known as “compulsory winding-up”), generally on the application of a creditor such as HMRC, and allows assets to be disposed of in an orderly manner and employee claims to be processed without the delay which arises in court proceedings.

Why place a company into CVL?

Under company law, directors have a primary duty to act in the best interest creditors as soon as they become aware that the company is insolvent, and by taking steps to place the company into CVL they can demonstrate that they have acted properly. A company is insolvent if:

  • it is unable to pay debts as they fall due (for example if a creditor obtains judgment or commences enforcement);
  • the value of its assets are less than the amount of its liabilities, taking into account contingent and prospective liabilities (known as “the balance sheet test”).

The balance sheet test might apply as a result of the loss of an asset or future business that make eventual failure of the business inevitable.

What should a director do?

When directors consider that insolvency is likely they should seek advice of a licensed insolvency practitioner, who will assist in reviewing the situation as a whole. It may be that this will identify opportunities for re-finance or new investment in part of or all of the business. In such cases, assets sales may be arranged, subject to independent valuation, and the business may continue operating to facilitate such disposals. Where a creditor has already petitioned for compulsory winding up, this will create a major obstacle.

The Board Meeting

The next stage in CVL is for a board meeting to be held with instructions to the insolvency practitioner to proceed with steps to place the company into CVL. It is essential that the practitioner is licensed to accept nomination as liquidator, as failure to appoint a liquidator would leave directors open to criticism and possible disqualification and other claims. The board meeting will set out the procedure for creditors to pass a resolution to place the company into CVL. Under company law, this is a special resolution, and the requirements for passing such a resolution must be met. If there are shareholder disputes, it may be necessary to deal with these first, and again the assistance of the insolvency practitioner may be needed. (In cases where a bank or other finance provider holds security such as a debenture, additional notice may be necessary.) The special resolution will place the company into liquidation and a liquidator will be nominated.

The Meeting of Creditors

The next stage in CVL is for a board meeting to be held with instructions to the insolvency practitioner to proceed with steps to place the company into CVL. It is essential that the practitioner is licensed to accept nomination as liquidator, as failure to appoint a liquidator would leave directors open to criticism and possible disqualification and other claims. The board meeting will set out the procedure for creditors to pass a resolution to place the company into CVL. Under company law, this is a special resolution, and the requirements for passing such a resolution must be met. If there are shareholder disputes, it may be necessary to deal with these first, and again the assistance of the insolvency practitioner may be needed. (In cases where a bank or other finance provider holds security such as a debenture, additional notice may be necessary.) The special resolution will place the company into liquidation and a liquidator will be nominated.

Post-appointment of Liquidator

When appointed the liquidator has extensive duties to perform, regardless of whether there are funds in the liquidation to pay for this service. For this reason an insolvency practitioner will often seek a substantial fixed fee at the outset. If there are assets to be realized, such a fee may be reimbursed as an expense of liquidation in due course. The liquidator must deal with claims of employees, which are paid, in part, by the Redundancy Payments Office, and must carry out investigations into the affairs of the company to identify claims and possible misconduct by directors. Misconduct must be reported under the Company Directors Disqualification Act 1986 (known as “CDDA” for short) and proceedings may be brought against directors and former directors by the Insolvency Service. Again, at the outset an experienced insolvency practitioner will highlight areas of concern to directors, so there should be no unwelcome surprises for directors.
Where there are company assets, a liquidator will arrange for their sale, ensuring that full market value is achieved, usually by instructing specialist asset agents. If sufficient is realised to cover costs of liquidation, funds will then be available for distribution to creditors, with employee-related claims and those of secured lenders such as banks and invoice financiers ranking in priority. It will then be necessary to collate and agree claims of other “unsecured” creditors.

Is a CVL better than a Compulsory Liquidation?

Directors may think that it would be simpler, and cheaper, to sit back and wait for one or more creditors to place the company into compulsory liquidation. The difficulty is that as soon as the petition is presented to the court, company assets, including its bank account, are legally frozen, often for a period of weeks until the hearing of the petition. The liquidator appointed when the winding-up order is made will be the Official Receiver, who will interview directors on the affairs of the company and its failure and require them to prepare a statement of affairs. The Official Receiver also reports on conduct under the CDDA. The obligations of directors under compulsory liquidation are therefore as great as under CVL.
Liquidation in either form relieves directors of their powers but also of their obligations in respect of the company, and if claims (arising from personal guarantees, or as a result of prior transactions of the company, and disqualification proceedings) do not follow, they will effectively have drawn a line under the failed business and be free to get on with their business lives.

Please call Mark Bassford FCA or John Paylor on 020 7002 7830 if you are the director or shareholder of a company and believe that it is insolvent, or would like further advice. Alternatively ask your company’s existing professional advisors to contact us to discuss the options available.

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