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General Insolvency Liquidation, Pre-Packs & Phoenix Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs Winding Up Petitions

Guide to Insolvent Liquidation and When and How it is Used

Insolvent Liquidation involves a formal process to close a company. It happens when a company is insolvent, which means it does not have enough cash or liquid assets to pay its debts and the directors have concluded that continuing to trade will be detrimental to creditors.
There are four tests (set out in the Insolvency Act 1986) any of which can be used to establish whether a company is insolvent.  The tests don’t necessarily mean that the company will have to close down, although often directors assume that it must.  However, there are remedies that could save the company if at this stage it calls on a licensed insolvency practitioner or business turnaround adviser, who would carry out a review of the accounts, the assets including property, stock and debts and the liabilities. With help from the adviser, the company can develop realistic plans for it to survive and trade out of insolvency.
Once it is decided that the company is insolvent, and cannot be rescued, it should be closed down in an orderly fashion which means via a liquidation process. This involves the company’s assets being turned into cash and used to pay off its debts to creditors.
There are two types of liquidation, one compulsory and one voluntary and both are legal processes.
Voluntary liquidation through a Creditors’ Voluntary Liquidation (CVL) is when the directors of the company themselves conclude that the company can no longer go on trading and should be wound up.
Normally they would engage an insolvency practitioner to help guide the directors through the formal procedure, which involves a board meeting to convene shareholder and creditor meetings.
The nominated liquidator normally sends out notices to shareholders and creditors having obtained their details from the directors and helps directors prepare the necessary formal documentation that is legally required.
The nominated liquidator must be a licensed insolvency practitioner who provides his consent to act which must be available for inspection at the meeting.
If the directors have left consulting too late they can then find themselves facing the court winding up procedure rather than having the option of a CVL.
Compulsory liquidation is triggered by a creditor formally asking the courts to have a company closed down by submitting a Winding Up Petition (WUP. In this case the court decides whether or not to support the petition by ordering that the company be wound up (compulsorily liquidated).
Upon a winding up order being made, an officer called the official receiver is automatically appointed to take control of the company to oversee the process of closing it down.  The official receiver may, if he/she wishes, appoint a liquidator to assist in dealing with recovering and selling any assets.

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General Insolvency Liquidation, Pre-Packs & Phoenix Rescue, Restructuring & Recovery Turnaround

Guide to Creditors Voluntary Liquidation (CVL) from K2 Business Rescue

Creditors’ Voluntary Liquidation is a process by which the directors of an insolvent company can close it down in an orderly fashion without involving a court procedure. There are four tests of insolvency laid down in the Insolvency Act 1986.
Insolvency does not necessarily mean that a company should be closed down, but depends crucially on whether or not continuing to trade will enable the company to emerge from insolvency and will improve the position for creditors.
If the company does continue to trade, the directors should seek professional advice as they have a legal obligation to act in the best interests of the company’s creditors and if the company eventually does have to be closed down they will need documented proof of this or they risk becoming personally liable for the company’s debts.
The CVL procedure is defined by the 1986 Act and involves a board meeting at which the directors formally agree that the company should cease to trade. The next step is to seek shareholder consent. At least 75% of the shareholders must approve the directors’ proposal and at least 50% must approve the nominated liquidator. The shareholders may disagree and wish to appoint new directors to save the company.
Documents must be prepared including Statutory Information on the company, a history of the business, historical financial information of the company, deficiency account, a statement of affairs and a list of creditors.
A creditors’ meeting is also convened to confirm the nominated liquidator or appoint the creditors’ own nominee, who will need approval by at least 50% of the creditors. All nominated liquidators must be licensed insolvency practitioners who have provided consent to act, which must be available for inspection at the meeting.
The liquidator’s duties include dealing with assets which are normally sold, accessing creditors’ claims and distributing surplus cash to creditors following a strict order of legal priority. They must also investigate the accounts and activities of the company and in particular look at the transactions prior to the company being placed into liquidation. Having done this they report to the Insolvency Service on the conduct of the directors.
A CVL is a very efficient procedure with the liquidator taking over responsibility for dealing with creditors and closing down the company. It also demonstrates that the directors were responsible in carrying out their duties by closing down the company in an orderly manner when they believed it should cease to trade.