Creditors’ Voluntary

Liquidation
Creditors’ Voluntary Liquidation (“CVL”) is the most common insolvency procedure for insolvent limited companies and is the mechanism for a formal winding-up of a company’s affairs.

This procedure is initiated when the shareholders, usually at the directors’ request, decide to put a company into liquidation because it is insolvent on the basis either the company cannot pay its debts as they fall due or it has more liabilities than assets.

The directors will have recognised that the company cannot continue to trade and there is no other appropriate rescue procedure available; or, following another insolvency process (for example Administrative Receivership or Administration), there are funds available for distribution to unsecured non-preferential creditors.

The process involves the appointment of a responsible person who has a duty to realise the company’s assets and distribute the net-of-costs residue to its creditors in accordance with the law. That person is the Liquidator, who must be a licensed insolvency practitioner.

Members’ Voluntary Liquidation

Members’ Voluntary Liquidation (“MVL”) is the winding-up of a solvent company through the process of realising its assets, paying creditors and returning the surplus to the shareholders.

The company may no longer be required for the purpose for which it was formed, or the winding-up may be in conjunction with/predicated on the retirement of the proprietors.

The company must be in a position to settle all of its liabilities in full within a period of no more than 12 months of the date of commencement of the MVL.

Surplus funds are distributed to the shareholders who generally gain tax benefits by receiving a capital gain on their shares rather than distributions from the company by way of salary or dividends.

Although the process relates to a solvent rather than an insolvent company, the Liquidator must be a licensed insolvency practitioner.

Compulsory Liquidation

Compulsory liquidation occurs when an insolvent company is wound up by an order of the court, often after the company has failed to comply with a statutory demand requiring payment of a debt within 21 days.

The Court will issue a winding-up order on the petition by a creditor, the company itself, or a shareholder. A winding-up petition may also be presented by the Secretary of State for the Department for Business, Innovation and Skills on grounds of public interest.

The Official Receiver then acts as Liquidator, and he has 12 weeks in which to decide if there are sufficient assets to justify convening a creditors meeting with a view to the appointment of a licensed insolvency practitioner as Liquidator.

Company Voluntary Arrangement

A Company Voluntary Arrangement (“CVA”) is defined as “a company’s proposal to its creditors for a composition in satisfaction of its debts or a scheme of arrangement of its affairs”. This definition essentially allows a company to propose any arrangement it wishes with a view to rescheduling or writing off its debts. Typically, a company will propose that a pool of money be made available to creditors, perhaps funded by a third party or from a sale of specified assets, or that specified amounts from future profits be set aside from which creditors will be paid a dividend or dividends. The dividend(s) will be paid in full satisfaction of the debts owing to creditors. The part of the debt which is not repaid out of dividends is not recoverable.

The company will have encountered serious cash flow difficulties but retained the ability to be viable and profitable when relieved of historic debts. The company has a blank canvas on which to frame its offer to creditors, but the aim of the CVA proposal should be to convince creditors that the dividends to be paid to them under the CVA will be greater than in liquidation or any other alternative circumstances.

The directors remain in control of the company. Implementation of the CVA is overseen (including monitoring of the company’s trading performance) by a Supervisor, who must be a licensed insolvency practitioner.

A CVA proposal cannot affect the rights of secured creditors to enforce security or the priority rights given to preferential creditors by law without such creditors’ consent.

Administration

A company experiencing financial difficulties and pressure from creditors can be placed into Administration, which gives a company protection from its creditors whilst it reorganises its financial affairs.

Control of the company is assumed by an Administrator, who must be a licensed insolvency practitioner, who may be appointed:

• By an order of the court on application by the company, the directors or one or more creditors
• Without a court order by the company, the directors or a creditor who holds a floating charge over the assets of the company.

If necessary, an Administration proceeding can be secured in a matter of hours, thus giving the company almost immediate protection from creditors.

When appointed, the Administrator will liaise with the existing management of the company to formulate an achievable business recovery or restructuring plan with the following objectives in mind:

• Rescuing the company as a going concern, or if that cannot be achieved;
• Achieving a better result for the creditors as a whole, than would be likely if the company were wound up (i.e. liquidated) without first being in Administration, or if that cannot be achieved;
• Realising property of the company in order to make a distribution to secured or preferential creditors.

To achieve these objectives, the Administrator has the power to carry on the business of the company and realise its assets.

The Administrator will prepare proposals for achieving the objectives of the administration and they will be presented to the creditors for their approval.

The Administration must be concluded within one year, although this can be extended with the permission of the court or creditors if more time is needed to achieve the purpose of the Administration.

On conclusion of an Administration, the company may:

• Be returned to the control of its directors
• Enter into a CVA
• Go into Liquidation
• Be dissolved

Administrative Receivership

An insolvency practitioner can be appointed as Administrative Receiver by a lender with a floating charge when a company defaults on the terms of its borrowing. The floating charge must be over the whole, or a substantial amount, of the company’s assets.

The Administrative Receiver may carry on the company’s business in order to maximise the realisation of the assets comprised in the charge to repay the secured and preferential creditors.

It is not possible for a lender to appoint an Administrative Receiver under a security created after 14 September 2003. This is part of the Government’s drive to encourage the use of Administration in place of Administrative Receivership.