Types of Insolvent Liquidations
Creditors Voluntary Liquidation (CVL)
Insolvent companies where the directors and shareholders instigate the Liquidation.
Where the Court puts the company into Liquidation, usually at the instigation of a creditor.
What is Liquidation?
Liquidation is the process whereby a company is shut down so that its assets can be sold and distributed to its creditors. The directors cease to act and the Liquidator takes over complete control of the company. His powers and responsibilities are set out in the Insolvency Act and are principally confined to realising the assets, agreeing the claims and distributing the funds. The directors retain the duty to co-operate with the Liquidator. If there are enough assets, after costs, to pay all creditors in full then anything left over will go to the shareholders.
Creditors Voluntary Liquidation (CVL)
The Insolvency Act envisages that directors will take steps to deal with insolvent companies before they reach the stage of being forced into compulsory Liquidation. What they are expected to do is to put them into Creditors Voluntary Liquidation. In order to do this it is first necessary to instruct a Licensed Insolvency Practitioner (IP) to agree to accept appointment. He (or she) will guide the directors through the procedures which involve preparing a statement of the company’s affairs and report on the company’s history and causes of failure and then calling a meeting of shareholders and informing the creditors of their decision to appoint a liquidator. The creditors will have an opportunity of calling a meeting to consider appointing an IP of their choice instead. They can also appoint a committee of creditors to assist and advise the Liquidator if they wish, but again this is rare except in large Liquidations. In the meantime there can be an orderly closure of the business in such a way that the best value can be achieved for the assets, possibly by completing work in progress or getting in book debts that might otherwise be hard to collect. The costs of a Creditors Voluntary Liquidation are usually less than a Compulsory Liquidation because there is almost no involvement from, or fees charged by, the government’s Insolvency Service or the Court. The costs are normally paid out of the assets of the company.
If a company is insolvent and cannot pay its debts it is usual that the directors and shareholders will arrange for it to be put into Creditors Voluntary Liquidation. If they do not do so then a creditor can apply to the Court for a Winding Up Order. In those circumstances the Liquidation that follows is called a Compulsory Liquidation. The creditor will usually (although it is not strictly necessary) serve the debtor company with a Statutory Demand, which is simply a form stating what debt is owing and that if it is not paid with 21 days a Petition will be presented to the Court for a Winding Up Order. Unlike in bankruptcy there is no provision for a debtor to apply to the Court the set aside a Statutory Demand if the debt is disputed. All the company can do to stop the presentation of the petition is to apply to the Court for an injunction. If the debt is not paid by the end of the 21 days the creditor may present the Petition to the Court which will fix a date for hearing it. Notice of the Petition will be advertised so that the company’s other creditors, and more importantly its bank, will get to hear of it. If the debt has not been paid by the time of the hearing then the non payment of the Statutory Demand will be evidence of insolvency and the Court will make the Winding Up Order. The Liquidation will be deemed to have started on the date of the presentation of the Petition which means that any transactions taking place after that date are invalid. The company’s bank therefore will freeze the bank account immediately it hears of the Petition making it almost impossible to pay the debt. For that reason Statutory Demands and Petitions must be taken very seriously.
When a Compulsory Winding Up Order has been made, the Official Receiver, who is a civil servant employed by the Insolvency Service an agency of the Department for Business, Energy & Industrial Strategy (previously called the Dept. of Trade and Industry or DTI) is automatically put in charge of the company. His first job will be to close the company down, dismiss the employees and secure the company’s assets. He will interview the directors to find out who the creditors are and notify them. He will not under any circumstances continue the business. In theory, if he can be convinced that it is worth trying to save he can arrange for a special manager to be appointed provided that he first obtains unlimited guarantees from creditors. In practice however it is very rare that creditors will put more funds at risk after a Winding Up Order has been made; after all, if the directors had not taken the steps available to them to try to save the business by a Voluntary Arrangement or some other process, why should the creditors help now?
If there are enough assets to justify the costs, the Official Receiver will arrange for a Licensed Insolvency Practitioner to be appointed Liquidator, otherwise he will be the Liquidator. Whether or not he is Liquidator the Official Receiver will remain responsible for investigating the conduct of the directors and taking whatever action he considers appropriate to instigate prosecution of offenders. He will be concerned, for example, to see if the directors continued trading when they knew or ought to have known that the company was insolvent; whether any creditor has been given preferential treatment e.g. the directors or perhaps the bank, or landlord, who may have been guaranteed by the directors. He will check to see if there have been any breaches of company law or tax law, e.g. late filing of accounts, annual returns etc. If there is evidence that the directors had not acted properly then the Insolvency Service may bring a prosecution under the Company Directors Disqualification Act.
The costs of a Compulsory Liquidation are generally higher than those for a Voluntary Liquidation because the Insolvency Service charges substantial fees to finance the costs of running the Official Receiver’s department and paying for those cases where there are no assets to pay for their own Liquidation. There is a one off charge of £6,000 together with a further charge of 15% of all assets if the Official Receiver is liquidator, in addition to the other Liquidation costs. For this reason Compulsory Liquidations are generally less beneficial to creditors than Voluntary.