Options for Companies

Creditors’ Voluntary Liquidation (CVL)

A CVL is instigated by the directors of a company to wind it up when it can no longer trade solvently.

A CVL involves the following steps:

  • Directors convene a board meeting and decide to wind up the company.
  • A shareholders’ meeting is held, shortly afterwards, when appropriate resolutions are passed to wind up the company.
  • Usually, a creditors’ meeting will also have been convened, shortly after the shareholders’ meeting.

Creditors then determine who should be appointed liquidator.

Creditors will be provided with a report detailing the company’s history and its reasons for failure, together with a financial statement (statement of affairs).

Following the appointment of the liquidator, certain duties must be carried out including:

  • Realising any company assets
  • Investigating the company affairs including the directors’ conduct
  • Where possible distributing any surplus funds to creditors

Compulsory Liquidation

This type of insolvent liquidation results in a company being wound up by the court.

This usually involves a winding-up petition presented by a creditor – although it can also be presented by the directors or shareholders.

Once a winding-up order has been made, a company will be dealt with by a Government officer known as the Official Receiver.

However, an external insolvency practitioner can be appointed as liquidator at a subsequent date by creditors or the Secretary of State.

The Official Receiver will continue to investigate the conduct of the Directors with the appointed liquidator carrying on with the remaining duties, similar to those in a CVL.

Administration

Administration is an insolvency process that can provide protection for an insolvent company whilst it explores possible rescue options.

An administrator can be appointed by the shareholders or company directors, or one may be appointed by a secured creditor (eg a bank) looking to protect its financial interest.

Once a company is placed into administration, it has protection (a moratorium) from any legal action unless the court directs otherwise.

The administrator will review the options available to him or her which include the following:

  • Trading the business and trying to sell it as a going concern
  • Proposing a Company Voluntary Arrangement (CVA) with the company’s creditors
  • Realising its assets and winding the company down

Possible exit routes from administration include the company being returned to the directors; dissolution, or being placed into compulsory or creditors’ voluntary liquidation.

Pre-Pack Administration

This is basically the same process as a normal administration however it involves the immediate sale of the business and assets, upon appointment of an administrator.

Pre-packs are a useful tool in selling the business as a going concern and maximising realisations for creditors.

However, the administrator must follow a strict protocol in order to ensure that creditors are not unfairly prejudiced.

Members’ Voluntary Liquidation (MVL)

The MVL process is carried out when a company is solvent and acts as a tax-efficient way to close it, distributing surplus assets to its shareholders.

The Directors swear a document (Declaration of Solvency). This states the company is able to pay all its creditors in full, plus statutory interest, within 12 months.

The company must be solvent and, unlike a CVL, creditors have little input, given they will be paid in full.

The liquidator will realise the assets, pay creditors in full then distribute any remaining funds to the shareholders. Once this is completed, the company is struck off and dissolved.

It is important to note that it is a criminal offence for directors to swear a declaration of solvency if the company is not solvent.

Company Voluntary Arrangement (CVA)

A CVA can either be used as a stand-alone process or by way of an exit route from administration.

It is a legally binding agreement between a company and its creditors to repay its debts, either in part or in full.

The company has to:

  • Prepare a document known as a proposal. This explains the reason for its financial difficulties and how it intends to return to profitability and pay is debts.
  • Include certain financial documentation by way of cash flow projections; details of assets and liabilities; and an outcome statement to compare the result for creditors should the CVA be accepted, rather than the company winding up.

In order for the CVA to be approved there is a requirement for more than 75% in value of creditors voting in favour. Therefore a larger creditor (in value) will have a greater influence on the outcome than a smaller one.

If the majority of more than 75% is obtained, then the CVA is legally binding on all preferential and unsecured creditors, irrespective of whether they voted.

The insolvency practitioner appointed (known as the supervisor) is not involved in the day-to-day running of the company but instead ensures that it complies with the terms of the proposal.

The supervisor will also agree the creditors’ claims, report on the progress of the CVA on an annual basis and make distributions to creditors from a central fund.

The CVA’s duration will be determined in the proposal.

Once the CVA is successfully completed, the company can continue to trade without any previous restrictions.

Should the CVA fail for any reason, it may be placed into creditors’ voluntary liquidation, compulsory liquidation or administration.