Creditors Voluntary Liquidation Overview
A creditors voluntary liquidation is one agreed with creditors and court action avoided.
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 not prepared to 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.
What Is The Purpose Of Creditors Voluntary Liquidation?
The purpose of creditors voluntary liquidation is that it enables a company’s directors to take matters into their own hands and start the liquidation process.
This is a responsible approach to dealing with an insolvent company instead of waiting for creditors to take action through a legal route via the courts which would result in what is known as compulsory liquidation.
The effect of creditors voluntary liquidation is that it enables an insolvent company’s affairs to be wound up after a company has ceased trading.
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.