Creditors Voluntary Liquidation
Creditors' voluntary liquidation is initiated by the directors of the company and is then ratified by the creditors of the company. However, whilst the creditors' voluntary liquidation procedure is voluntary (in that the directors are not being forced to recommend liquidation), it is usually the result of either outside creditor pressure or professional advice to the directors that the company is insolvent.
A company is Insolvent if it is unable to pay it's debts as and when they are due and payable.
Directors are usually unwilling to put the company into liquidation as they always think that better times are around the corner. However, the threat of potential actions against them for fraudulent and wrongful trading usually concentrates their minds.
Directors can be held personally liable for all liabilities incurred if they continue trading the company after they know or should have known that the company was Insolvent.
The basic procedure for a creditors' voluntary liquidation is as follows:
- A meeting of members and creditors are convened by giving minimum 14 days notice. Additionally the Notice must be advertised in London Gazette and two local newspaper.
- The directors prepare a Report and Statement of Affairs giving a brief history and reasons for the company's demise and of its financial position. This is given to the creditors at the creditors meeting and circularised to all creditors after the meeting.
- A director has to Swear an Affidavit confirming that the Estimated Statement of Affairs is to the best of his knowledge and belief true
- At the meeting of members they pass a Resolution to wind up the company and also nominate a liquidaton.
- Both the Resolutions and the Sworn Statement of Affairs are filed with Registrar at Companies House
- Additionally the above Resolutions are advertised in the London Gazette and two local newspaperswithin 14 day.
- The creditors' meeting must be held within 14 days of the members meeting, although in practice the members meeting is held one hour before the creditors meeting:
- there are minimum 7 days notice requirements for this meeting
- creditors' choice of liquidator takes priority over that of the members unless they ratify the appointment
- The appointment of liquidator is published in London Gazette and two local newspapersand filed with the Registrar at Companies House.
- The company assets are realised. Once creditor's claims are agreed the balance, after Liquidators fees and expenses, is distributed to creditors in required order
- A final meetings of creditors and members is held to approve the administration and the closure of the
- Final return filed with Registrar at Companies House
- Company is dissolved approximately three months later
A Statement of Affairs provides creditors with the following information:
- Details of all the assets showing the cost and the amount to be realised
- Details of all secured creditors and the amounts owed to them
- The names and addresses of all other creditors stating whether they are preferential or unsecured and the amounts due to them
The duties of the liquidator in a creditors' voluntary liquidation are essentially the same as those in a members' voluntary liquidation. Again he is the agent of the company and the directors' powers cease (but the directors are not removed).
The directors have a duty to assist the Liquidator otherwise he can apply to court to:
- have them orally examined under oath
- obtain a court order forcing them to comply with the Liquidators requests. Failure to comply will be Contempt of Court which will result in their imprisonment
The liquidator's duty is to realise the assets and distribute them in accordance with the statutory order and to investigate past transactions and the conduct of the directors. The liquidator has 6 months to make his report to the DTI with his recommendations as to whether the director should or should not be struck off. If the DTI bring such action director's can be Struck Off for a period of 2 to 15 years. It is this latter point which will usually take up much more time in a creditors' voluntary liquidation.
Additionally the liquidator will see if the directors can be sued for wrongful trading if they were trading while the company was insolvent.
The liquidator will be concerned to attack any past transactions which he feels are a preference and to investigate the actions of the directors in order to swell the fund of assets available to creditors. This is Liquidation takes place where a company is insolvent. Therefore the assets are certainly not going to be enough to pay off the creditors in full. The liquidator is concerned to increase the pool of assets to get as big a return as possible for the creditors.
The Liquidator has a duty to do a report on the directors to the DTI under the Directors Disqualification Act 1986.
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