A guide to creditors' voluntary liquidations
Introduction
A company can be put
into liquidation voluntarily, at the instigation of its directors, or compulsorily,
by order of the Court. The effect, in either case, is that a liquidator is
appointed to bring the company’s existence to an end so that it can be
dissolved. Where the decision to go into liquidation is taken voluntarily, if
the company is solvent and can pay all its creditors in full, the liquidation
is termed a ‘members’ voluntary liquidation’. If the company is insolvent and
cannot pay all its creditors in full, the liquidation is termed a ‘creditors’
voluntary liquidation’ which is the subject of this note.
Where the company is put into liquidation by order of the
Court, almost certainly because it is insolvent and usually at the instigation
of a creditor, the liquidation is termed ‘compulsory liquidation’ (or
‘winding-up by the Court’).
Is the company insolvent?
There are two tests set out in the Insolvency Act 1986 S123.
(1) Is the realisable value of the company's assets more than its liability
including contingent liability? (2) Can the company pay its debts as and when
they fall due? If the answer to either is no then it is insolvent. If directors
suspect this is the case they usually contact an IP.
An IP will meet with the directors, confirm insolvency and
go through the options available. The catalyst for a creditors’ voluntary
liquidation is a decision by the directors that the company is insolvent and
can no longer continue to trade. No one outside the company can take any step
to put it into voluntary liquidation. The timing of the decision is in the
hands of the directors, but it may be directly influenced by failure to obtain
adequate finance or by the loss of a major customer. The wrongful trading
provisions of the Insolvency Act 1986, imposing potential personal liability on
directors who allow a company to continue to trade beyond the point of no
return, ought to persuade directors to make the required decision earlier
rather than later, with the result that more funds should be available to pay
the creditors.
Members’ meeting
Once the decision to liquidate has been taken, the directors
will normally instruct the IP to assist to call a meeting of members and a
meeting of creditors, the meetings to be held in that order. The purpose of the
members’ meeting is to pass the resolution placing the company in liquidation
and to nominate a liquidator. Although the company is in liquidation from the
time the members’ resolution is passed, the nominated liquidator’s powers up to
the time of the creditors’ meeting are limited to taking control of and
protecting the assets and disposing of perishable goods. Usually, the
creditors’ meeting is held on the same day as the members’ meeting, but it can
be held up to 14 days later.
Creditors’ meeting
The creditors’ meeting (under section 98 of the Insolvency
Act 1986) is held so that the creditors can be informed of the company’s state
of affairs and can appoint a liquidator. They have the opportunity to confirm
the members’ choice of liquidator or to make a choice of their own if there are
sufficient votes in favour. The convening and organising of the creditors’
meeting is the duty of the directors, but they will usually enlist the help of
an insolvency practitioner to ensure that the legal requirements are met. These
requirements are:
- Every known creditor must be given at least seven days’ notice by post
- The notice must give the name and address of an insolvency practitioner who will supply information on the company’s affairs free of charge, or an address where a list of the names and addresses of the company’s creditors will be available for inspection free of charge two business days before the meeting
- The notice must be advertised in the London Gazette
- The meeting must commence between 10am and 4pm and be held at a place convenient to the creditors
- a proxy form must accompany the notice to creditors
- the notice must state where and by when the proxy form has to be lodged for a creditor to be entitled to vote at the meeting. An individual can attend a meeting in person without lodging a proxy form but must lodge one if someone else attends the meeting on his behalf. As a company is not able physically to attend a meeting, it must appoint a person who can. Any creditor wanting to vote without attending the meeting can nominate the chairman of the meeting or someone else who will be at the meeting to be its proxy, and can instruct that person to vote either in a specific manner or at that person’s discretion
- The notice must specify what proof of debt is to be lodged as evidence of debt. A statement of account is usually all that is required
- The directors must prepare a statement of the company’s affairs, sign it and present it to the meeting of creditors
- One of the directors must preside at the meeting as chairman
- The liquidator nominated by the members must attend the creditors’ meeting and report on any powers exercised since the members’ meeting
At the meeting either the presiding director or the
nominated liquidator or a solicitor will report on the state of the company’s
affairs and the causes of its failure. Creditors are entitled to ask questions
on any matter on which they require clarification or information. A resolution
will be put to the meeting for confirmation of the appointment of the members’
choice of liquidator, but the creditors may put an alternative resolution that
someone else (who must be an insolvency practitioner) be appointed.
A resolution is passed by a simple majority in value of
those present and voting, in person or by proxy. This may be achieved by a show
of hands or, if the result cannot be determined that way, by a poll. It must be
remembered that the director chairing the meeting will hold proxies that must
be used to vote in accordance with the instructions of the giver of the proxy.
He is likely to hold proxies representing inter-company debts and he is also
likely to be a creditor for monies owed to him and he is entitled to vote on
that debt. The resolution that is passed at the meeting determines who will be
the liquidator of the company. If the person nominated by the members falls to
secure appointment at the creditors’ meeting, he steps down. In many
liquidations two liquidators are appointed to ensure that one is always
available to deal with matters arising in the liquidation.
Liquidation committee
Once the appointment of the liquidator has been resolved,
the creditors may, if they wish or if the liquidator requests, appoint a
liquidation committee (minimum three, maximum five creditors) to represent
their interests and to supervise and assist the liquidator. Unless a proxy
states otherwise, any proxy holder at the meeting may represent his company as
a member of the committee without further authorisation. A first meeting of
this committee will usually be held immediately after the creditors’ meeting to
establish the frequency of meetings and to resolve any immediate matters. The
functions of the liquidation committee include: sanctioning continuance of such
directors’ powers, if any, as may be considered appropriate (these powers
otherwise cease on the appointment of the liquidator); approving the payment of
any class of creditors in full; approving compromises with creditors; receiving
reports from the liquidator on the conduct of the liquidation; determining the
basis of the liquidator’s remuneration. A committee member can be represented
by someone else at committee meetings, can resign and can be reimbursed
reasonable travel expenses.
Conduct of the liquidation
The liquidator is given statutory powers and duties to
enable him to conduct the liquidation and he will, or can, do the following:
- Realise the company’s assets
- Bring or defend legal actions
- Examine the validity of any charges over the company’s assets
- Examine the conduct of the director (real, de facto and shadow) prior to liquidation for evidence of malpractice, misdemeanour, misfeasance, breach of fiduciary duty or wrongful trading
- Examine the company’s transactions prior to liquidation for evidence of fraudulent trading, preference to one creditor over others or undervalue transactions
- Apply to the Court for restoration of property, or for a personal contribution to the company’s assets, if evidence of the above is found (assuming such restoration or contributions cannot be obtained by agreement with the offender(s))
- Submit details of the company’s directors to the Department of Business & [ ] (BIS) and also submit a report on any misconduct by any of the directors or shadow directors (in applicable cases the BIS will seek a disqualification order from the Court)
- Agree the claims of creditors (unsecured creditors are automatically entitled to VAT bad debt relief and should submit a net claim)
- Distribute funds to creditors whenever it is appropriate to do so.
The order of priority is:
- Fixed charge creditors, where the liquidator has realised the assets (secured creditors are dealt with in more details below)
- Preferential creditors, employee claims for wages and holiday pay
- Floating charge creditors
- Prescribed part
- Unsecured creditors
- If all the above claims are paid in full, interest is payable from the date of liquidation at statutory rates
- Report to the liquidation committee at six-monthly intervals unless agreed otherwise
- Provide an annual progress report
- Pprepare a draft final report which is sent to creditors 8 weeks prior to final meetings of creditors and members to explain the conduct of the liquidation
Some questions answered
When is a company insolvent?
A company is defined as going into insolvent liquidation
when the assets are insufficient for the payment of its debts and other
liabilities and the expenses of liquidation. The insolvency legislation does
not, however, define precisely when a company is insolvent. It can be said that
a company is insolvent either when it is unable to pay its debts as they fall
due or when the value of its assets is less than the amount of its liabilities,
taking into account its contingent and prospective liabilities. There are many
instances of companies being technically ‘insolvent’ for a period of time but
then returning to solvency. The real question, therefore, should not be ‘when
is a company insolvent?’ but ‘has the company reached the point at which there
is no reasonable prospect that it will avoid going into insolvent liquidation?’
Who can act as liquidator?
A liquidator must be an insolvency practitioner authorised
to act by a recognised professional body or by the BIS. The recognised
professional bodies are the Insolvency Practitioners Association, the three
institutes of chartered accountants, the Chartered Association of Certified
Accountants and the law societies. Before accepting any insolvency appointments
every insolvency practitioner must hold a licence from his authorising body and
must hold a general insurance bond against his own fraud or dishonesty. On
accepting an appointment he must obtain a further insurance bond covering the
value of the assets under his control in the insolvency.
I have been trying to collect my debt through the court.
What can I do now?
If you have not managed to recover your debt before the
company goes into liquidation you will be unable to continue. The Insolvency
Act decrees that you can only retain the benefit of an execution against the
company if it is completed before notice is received of a meeting at which it
is proposed to pass a resolution to liquidate or before the members pass the
resolution to liquidate, whichever is the earlier. Execution is completed by
the seizure and sale of goods or by the receipt of an attached debt. If,
therefore, on the relevant date the recovery process is still being processed
in the court and even if the bailiff is in the process of levying execution of
a judgement, it will be of no use as it will not have been completed.
I have retention of title on goods supplied to the company.
Can I recover them?
If your retention of title claim is valid, the goods will
not belong to the company in liquidation and the liquidator is obliged to allow
you to recover them. You should notify the liquidator in writing as soon as
possible after he has been appointed so that he is made aware of your claim.
The liquidator, however, has a duty to preserve the company’s assets and cannot
allow goods to be recovered unless he is certain that the retention of title
claim is valid. In the interests of the general body of creditors he must
attempt to resist any such claim.
The company has my goods on hire purchase/lease. Where do I
stand?
So long as title to the goods has not passed to the company,
they remain your property and you are entitled to repossess them. The terms of
your agreement will normally state that liquidation terminates the agreement,
but the liquidator may wish to strike a commercial deal with you if he requires
to use the goods for a short period of time. That is a matter between you and
him. You will be able to claim as a creditor in the liquidation, initially for
any arrears of charges up to the date of liquidation, but your final claim will
depend on the terms of your agreement. At the creditors’ meeting you may only
be aware of the arrears figure and you will seek to vote for that value. The
chairman has the right to treat your claim as unascertained, but he may put an
estimated value on the claim purely for voting purposes.
I am a secured creditor. What happens to me?
A secured creditor is one who holds a mortgage, charge, or
other security over property of the company. If you fall into this category you
are entitled, subject to the terms of your documentation, to take the assets
that you have secured by a fixed charge and realise them. If the proceeds more
than satisfy your debt, you must pay the surplus to the liquidator. If you debt
is not fully satisfied, you will be able to look to the proceeds of any assets
that you have secured by a floating charge but the preferential creditors will
have a claim ahead of you if they have not been paid out of the proceeds of any
uncharged assets. You can claim as an unsecured creditor for any balance that
is still outstanding. If your debenture is dates after 23 September 2003 then a
prescribed part of the funds realised under its charge go into a fund for the
unsecured creditors, see below. If interest is payable under your
documentation, you will be able to recover it up to the date of repayment if
there are sufficient proceeds. If, however, you have to make an unsecured claim
for the balance, you will not be able to claim interest accruing after the date
of liquidation. At the initial creditors’ meeting you can only vote for the
value of your debt less the estimated value of your security. If you vote for
the full value of your debt you may forfeit your security.
Can I claim interest on my debt in the liquidation?
If the contract out of which the debt arises allows for
interest, that interest can be claimed without restriction up to the date of
liquidation (subject to the liquidator’s power to seek a Court order to set
aside all or part of an extortionate credit transaction). If the debt is due by
virtue of a written instrument and is payable at a certain time, interest not
exceeding 15% may be claimed from the due payment date up to the date of
liquidation. If a written demand for the debt has been made giving notice that
interest would be charged from the date of demand to the date of payment, that
interest can be claimed but the rate must not exceed 15%.
Who are preferential creditors?
Up until 23 September 2003 HMRC was a preferential creditors
for certain amounts owed to it in respect of PAYE/NIC and VAT. Since that date
only employees have a preferential claim for arrears at pay up to £800, all
unpaid holiday and pension contributions.
What is the prescribed part?
Since the abolition of the HMRC preferential claim, in order
not to provide an unfair advantage a liquidator is required to put aside a
certain percentage of the funds realised that would ordinarily be available for
the floating charge holder. This is 50% of the first £10,000 and 20% of the
remainder of up to a maximum total amount of £600,000. The fund is then used to
pay a (usually small) dividend to unsecured creditors.
I have employees - what happens to them and their claims?
On liquidation or shortly before they are made redundant, either
by the company if before liquidation or by the liquidator on appointment. They
are entitled to claim arrears of pay, holiday pay, redundancy pay and notice
pay from the Government using form RP1 which your IP will supply.