The Process

Voluntary Liquidation is the legal process used when a company’s directors themselves decide to wind-up a company’s affairs. Unlike Compulsory Liquidation, neither the Courts nor the Official Receiver are generally involved in placing a company into Voluntary Liquidation.

Voluntary Liquidation can be used by both solvent and insolvent companies. In both cases, the Voluntary Liquidation is started by the convening of a board meeting followed by a meeting of shareholders. Shareholders must usually receive 21 days notice of the meeting, although the company can then be placed into Voluntary Liquidation in a matter of hours if 90% (95% in some cases) of the shareholders agree and there is an urgent need to do so.

After the shareholders’ meeting there must be a creditors’ meeting, often held on the same day. Creditors must receive a statutory minimum of 7 days notice, although 14 days is generally considered to be better practice. Often creditors will receive 3-4 weeks notice.

Both Voluntary and Compulsory Liquidation generally protect the company from further enforcement action being taken by any single creditor whilst its affairs are wound up in an orderly manner by the Liquidator. Liquidation will also normally mean that the company concerned will cease to trade and its staff will be laid off, unless a successor company takes over the business.

The Liquidator

The Insolvency Practitioner (IP) who acts as Liquidator in the process is generally selected by the company’s directors, in agreement with the shareholders. However, in the case of an insolvent company, the creditors can vote for a different Liquidator, and if they do, their choice will prevail.

The duty of the Liquidator, regardless of who has chosen him, is to sell the company’s assets for the best possible price and to ensure that the company’s assets are shared out fairly amongst its creditors.

The Liquidator must also produce a disqualification report (D-Report) on the conduct of each of the company’s directors.

Re-start after Liquidation

Whilst the Liquidator must endeavour to achieve the best possible price for the company’s assets, he is not prevented from selling the assets to the existing directors, provided the transaction is disclosed to the creditors in the proper manner. The sale of a company’s assets to a connected party (such as its directors) is controlled by a practice statement to which Insolvency Practitioners must adhere: Statement of Insolvency Practice 13 (SIP13).

It may be possible, therefore, for the directors to open a new company to legitimately take over the old business (known as a “Phoenix”). However, it is important that such re-starts are only undertaken with the appropriate professional advice.

Directors owe duties to their existing companies (and their creditors) and may be in breach of these if they simply try to take over the business, either before or after a Liquidation, without utilising the proper processes. There are also restrictions upon directors with regard to re-using the name of a company that has been put into Liquidation, and potentially severe penalties for doing so if they have not legitimately purchased the rights to the name.

Although not generally a popular practice amongst the creditor community, a CVL re-start can save a viable core business, preserving jobs and creating future trading possibilities for suppliers and customers. For the smaller enterprise, a CVL re-start may be the only realistic option. However, recurrent Phoenix operations are likely to lead to an adverse conduct report and could result in disqualification from acting as a director.

DOWNLOADS & LINKS

R3 Creditors’ Guide to Voluntary Liquidation ››
 A guide for unsecured creditors published by the Association of Business Recovery Professionals.

R3 Creditors’ Guide to Liquidators Fees ››
The official legal wording relating to Liquidators Fees.

Insolvency Service “How to Wind Up Your Own Company” ›› 
Online guide to liquidation (winding up) and re-using a company name.

R3 Statement of Insolvency Practice 13 (SIP13) – “Acquisition of Assets of Insolvent Companies by Directors” ››
Guidance notes relating to disposal of assets to connected parties in an insolvency process published by the Association of Business Recovery Professionals.

Insolvency Service “Guide for Employees” ››
A useful guide to Redundancy and Insolvency for Employees published by 'The Insolvency Service', a government agency.