CREDITORS’ VOLUNTARY LIQUIDATIONS (“CVL”)

1. Introduction

1.1 A CVL occurs when a company is insolvent ie the company cannot pay its liabilities in full.

1.2 The directors initiate voluntary proceedings but the liquidation is controlled by the creditors of the company via a Liquidator who must be a licensed Insolvency Practitioner.

1.3 The members (shareholders) have no influence over the liquidation proceedings; their only role is at the outset, to approve the placing of the company into liquidation.

1.4 The meeting of creditors and members is convened to consider the company's financial position (as disclosed in the Statement of Affairs) and to appoint a Liquidator.

1.5 The liquidation commences from the time of the member's meeting.

1.6 The Liquidator displaces the directors of the company on appointment and takes over all control of its affairs.

1.7 The Liquidator realises the assets of the company and distributes the funds to all classes of creditors as far as funds permit in a specific order of priority, ie, expenses, preferential creditors, secured creditors, unsecured creditors, deferred creditors and shareholders and on an equal basis for each class of creditor.

2. Procedures for a CVL

2.1 Directors' meeting

2.1.1 This is called to consider the company's financial position and to resolve to call an extraordinary general meeting (an EGM) of members and creditors.

2.2 Members' meeting

2.2.1 The meeting must be convened in accordance with the company’s memorandum and articles of association and the Companies Act 1985.

2.2.2 The meeting must be called with at least 14 days' notice unless consent to a shorter notice period is agreed by 95% by value of members.

2.2.3 The meeting is called to pass the following resolutions:

· an extraordinary resolution to wind up the company, which has to be passed by a 75% majority of votes of those present and voting.

· an ordinary resolution to appoint a Liquidator, which has to be passed by more than a 50% majority of those present and voting.

2.2.4 For the meeting to be quorate there must be at least two members present either in person or by proxy.

2.3 Creditors' meeting

2.3.1 The meeting is governed by the provisions of section 98 of the Insolvency Act 1986 (the "IA").

2.3.2 The company must give the creditors at least 7 days' notice of the meeting.

2.3.3 The meeting must be held not more that 14 days after the members' meeting, though in good practice both meetings are usually held on the same day.

2.3.4 The meeting must also be advertised in the London Gazette and in two local newspapers.

2.3.5 The notice of the meeting must either:

· name an Insolvency Practitioner who must provide information and/or answer questions on the company's affairs free of charge, or

· give details of a place in the locality where the company operated where a list of creditors’ names and addresses will be made available free of charge.

2.3.6 The notice of the meeting must also state a time (which will not be earlier than 12 noon on the business day prior to the meeting) for the lodging of proxies in order to entice the creditors who cannot attend the meeting to vote at the meeting.

2.3.7 Provided a creditor has lodged his proof of debt with the Chairman of the meeting, that creditor is entitled to vote at the meeting unless:

· he is a secured creditor, whereupon he can only vote for any balance of his debt which is unsecured after deducting the value of his security estimated by him

· his claim is unliquidated or unascertained, whereupon he can only vote if the Chairman agrees to place an estimated minimum value on the debt for voting purposes.

2.3.8 The venue must be fixed bearing in mind the convenience of those attending and should be held between 10 am and 4 pm on a business day.

2.4 The decision of the creditors' meeting

2.4.1 The following resolutions need to be passed (sections 100 and 101 of the IA):

· to appoint a Liquidator

· to appoint a liquidation committee

2.4.2 Voting is determined by the value of claims lodged and the presence of the creditor either in person or by proxy. A resolution is passed if a majority in value, ie, 51% of those present in person or by proxy vote in favour of the resolution.

2.4.3 For a meeting to be quorate, at least one creditor who is entitled to vote must be present in person or by proxy.

2.5 The business at the meeting

2.5.1 The nominated Chairman of the meeting must be a director of the company.

2.5.2 The Chairman must present to the meeting a statement of affairs (section 99 of the IA), which must be as up to date as possible but, in any event, made up to a date not more than 14 days prior to the date of the meeting. This statement must be delivered to the appointed Liquidator at the end of the meeting who, in turn, must register it with the Registrar of Companies within 7 days of the meeting.

2.5.3 The statement of affairs will include the following information:

· details of company assets with book and realisable values together with a description of any fixed charges or HP commitments

· details of the company's liabilities by category, ie, creditors who are preferential, fixed and floating charge holders, unsecured, deferred and shareholders

· statutory information as lodged at Companies House

· a brief history of the business and the reasons for its demise

· a Deficiency Account showing the trading results since the finalisation of the last set of audited accounts to the date of the insolvency

· details of financing/charges on assets/loans/guarantees

· any other relevant information

2.5.4 If the Chairman is aware that certain creditors, having declared their intention to attend the meeting, are not present at the start time of the meeting, he/she must wait a further 15 minutes before the meeting commences, to allow for latecomers to arrive (Rule 12.4A of the Insolvency Rules 1986).

2.5.5 At the members' meeting a resolution will have been passed that nominates a Liquidator. If at the creditors' meeting there are no further nominations, then the appointment of the members' choice of Liquidator is confirmed. However, if at the creditors' meeting, another person is nominated as Liquidator, the creditors' nominee prevails unless any director, member or creditor applies to the Court for an order that someone else shall be nominated.

2.6 The Liquidator's duties after the meeting

2.6.1 The Liquidator must advertise his/her appointment in a local newspaper (Rule 4.106 of the Insolvency Rules 1986) and also lodge a notice of appointment with the Registrar of Companies.

2.6.2 A copy of the statement of affairs and a report of what took place at the meeting should be circulated to all creditors and members.

2.6.3 Following the meeting the directors' powers cease and only the Liquidator has the power to act in the name of the company.

2.6.4 The Liquidator must call annual meetings of members and creditors to inform them as to the progress of the liquidation (section 105 of the IA) and must call a final meeting to approve his/her account before the company can be dissolved (Section 106 of the IA). Each meeting is called by advertisement in the London Gazette specifying the date and time of the meeting and published at least one month before the meeting.

2.6.5 Meetings must be called to determine the wishes of creditors if the Liquidator believes it to be necessary (Rule 4.54 of the Insolvency Rules 1986) and must convene a meeting if requested to do so by 10% in value of the creditors (section 168 of the IA).

2.6.6 The Liquidator has full powers to act as necessary (including the power to carry on the business so far as may be necessary for the beneficial winding up of the company) but requires the sanction of the Court or the liquidation committee for the agreement of his/her own fees, the payment in full of any class of creditors, the compromise or arrangement with creditors and to bring specific legal proceedings (under the IA) such as wrongful and fraudulent trading and to overturn arrangements entered into by the company within a specific period prior to the liquidation constituting transactions at an under-value, preference and voidable floating charges.

2.6.7 The Liquidator has a duty to:

· realise assets at the optimum price

· agree creditors' claims

· report on the conduct of the directors and submit such reports to the DTI within 6 months of his/her appointment

· pay creditors in accordance with the prescribed order or priorities

· hold annual meetings and submit annual reports

· hold final meetings

· submit an annual Receipts and Payments Account to the Registrar of Companies.

2.6.8 The Liquidator is released from office at the final meeting of creditors, when the company's affairs have been fully wound up.

Shean Solicitors Limited

June 2006

This note is written as a general guide only.

It should not be relied upon as a substitute

for specific legal or other professional advice.

 
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