Voluntary Liquidation is the process by which the directors of a company, with the assistance of a licensed insolvency practitioner, put the company into liquidation. In contrast, a Compulsory Liquidation is a method by which a creditor issues a petition through the Court to have the company wound up.
When the liabilities of a company exceed its assets or it fails to pay its debts when due or there is no viable market for the company’s product or service, it is generally accepted that liquidation is the only exit route if refinancing, restructuring or formal arrangements such as a CVA are not feasible.
All directors have an obligation to make sure that the position of the business does not deteriorate further. Once a Company is insolvent, the directors' primary duty is to protect the interest of creditors - not the directors or shareholders.
However, winding up a struggling company also brings new opportunities and the fact that the directors have placed the company into liquidation does not prevent them from starting up a new company.
Creditors Voluntary Liquidation (CVL) is the most common form of Company Liquidation. Under this procedure company directors conclude the company is not viable, it is insolvent and they must stop trading. A meeting of the company’s directors is held to instruct a licensed insolvency practitioner to assist them to convene meetings of the company’s members (shareholders) and creditors.
A licensed insolvency
practitioner will then arrange for a creditors meeting as soon as possible (not less
than 14 days notice is required). At this meeting the creditors vote
to appoint a liquidator and this is why it's called Creditors Voluntary Liquidation.
A Creditors Voluntary Liquidation is the most common and
straightforward way for directors and shareholders to deal voluntarily
with their company's insolvency.
At the creditors meeting the insolvency practitioner, with the help of the directors will gather together all relevant financial information and call a meeting of the company’s creditors.
At the creditors meeting, the practitioner appointed by the directors may be confirmed or an alternative practitioner may be appointed if creditors present and voting (50%) opt to appoint someone else. At the meeting, the directors will present a report to creditors which should contain information such as extracts from the company’s accounts, trading history, sworn statement of affairs summarising the company’s assets and liabilities and a schedule of the company’s creditors.
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