What Is A Creditors Voluntary Liquidation?

Fast Liquidation Fact

A creditors voluntary liquidation is one agreed with creditors and court action avoided. It is one of the three types of liquidation procedures. The other two types are compulsory liquidation and members voluntary liquidation.

Liquidation is a legal process that enables a company to deal with its debts and assets. It is not a mechanism through which debts disappear and get written off. They may, however, go unpaid. 

Creditors Voluntary Liquidation Overview

It is a voluntary procedure because nobody has forced the company into liquidation. It has gone into liquidation by way of agreement.

A creditors voluntary liquidation arises when a company is insolvent or when the directors are either not prepared to or cannot swear the statutory declaration of solvency typical of a members voluntary liquidation.

The effect is that as creditors will suffer a loss due to the insolvency of the company an explanation of this position is required. To enable that to take place the liquidator will undertake an investigation as to the reasons for the company’s failure and it being placed into voluntary liquidation.

Principles Of Creditors Voluntary Liquidation

The principles of creditors voluntary liquidation involve:

• A Liquidator must get in, realise and distribute the assets to creditors after costs.
• The appointment of a liquidator should not be the choice of a person whose interests conflict with the purpose of liquidation.
• The liquidator has to identify, discover and recover the assets of the company.
• The conduct of the directors is to be scrutinised by the liquidator, with misconduct reported to the Insolvency Service.
• A liquidator has to conduct the liquidation efficiently, vigorously and be unbiased.
• Adjudication of creditor claims is subject to a fair process enabling an appeal to be lodged with the court if necessary within 21 days of any claim’s rejection.
• Liquidation is neither a debt write-off nor an asset write-off tool to be deployed at the expense of creditors.
• A liquidation is a procedure to undertake an orderly winding up of a company in the interests of its creditors.
• Any distribution to creditors needs to take into account the class of each creditor and the statutory order of payment in insolvency proceedings.

Benefits For Directors Of Creditors Voluntary Liquidation

The benefits for directors of creditors voluntary liquidation is:

• Directors can take matters into their own hands and start the liquidation process voluntarily. No need to wait for creditors to take action.
• It is a legally recognised procedure permitted by Chapter IV of the Insolvency Act 1986 to close and wind up an insolvent company.
• Unlike a voluntary strike off at Companies House, it cannot be objected to by creditors.
• An independent liquidator takes over and is responsible for the company instead of the directors.
• The company can cease trading and the liquidator will deal with the consequences for creditors.
• It results in an orderly winding up of a company’s affairs through the realisation of the assets and distribution to creditors.
• The director’s choice of insolvency practitioner is usually the person who is the liquidator.
• Company debts are dealt with and the creditors can be satisfied their concerns will be looked into by the liquidator.
• The company can be formally dissolved by Companies House once the liquidation is concluded.
• It is a responsible approach to dealing with an insolvent company rather than waiting for creditors to take action through the courts.
• It is rare that creditors apply to the court to put a company into compulsory liquidation when it is already in voluntary liquidation.

How To Get A Company Into Creditors Voluntary Liquidation

In order to get a company into creditors voluntary liquidation a formal meeting of the company needs to be held by the shareholders.

Of the shareholders that vote at least 75% of those attending and voting at the meeting of shareholders need to vote for the company to go into voluntary liquidation.

In most cases a further meeting of creditors will be held so that the appointment of the liquidator can be approved by creditors.

What Happens In Creditors Voluntary Liquidation?

Once a liquidator has been appointed they will look to realise the company’s assets for the benefit of the creditors.

The liquidator has a duty to get in, realise and distribute the company’s assets and after paying the costs and expenses of the liquidation will then distribute the surplus funds to the unsecured creditors proportionate to the size of their debts.

Why Creditors Voluntary Liquidation Necessary?

If creditors voluntary liquidation was not an available option then the number of forms of liquidation would be reduced.

It is one of the three forms of liquidation that are available. The others are members voluntary liquidation and compulsory liquidation.

The reason that the directors cannot do the liquidation themselves and that a liquidator has to be appointed is because of the conflict of interest in having directors review a company’s affairs and transactions that may have been entered into for the benefit of directors.

Liquidation as a procedure is required because without it there would be no rules as to how the assets realised should be shared amongst creditors and others who have an interest in the liquidation funds.