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This occurs when the shareholders, usually
at the directors' request, decide to put a company into liquidation
because it is insolvent. Either the company cannot pay its
debts as they fall due or it has more liabilities than assets.
The purpose of the liquidation is to
appoint a responsible person who has a duty to collect the
company's assets and distribute them to its creditors in accordance
with the law. That person is the liquidator, who must be a
licensed insolvency practitioner.
When is a company placed into CVL?
The most common circumstances are where
the directors recognise that the company cannot continue to
trade and there is no appropriate rescue procedure available;
or, following another insolvency process (for example an administrative
receivership or administration), there are funds available
ior distribution to unsecured creditors.
What involvement do creditors have in putting
a company into CVL?
A meeting of creditors must be held within
14 days of the shareholders' meeting (it is normally held
on the same day) at a venue convenient ior the majority of
creditors. Notice of the creditors' meeting will be sent to
all known creditors at least 7 days before the meeting, which
will also be advertised publicly.
Creditors are entitled to inspect a list
of names and addresses of the company's creditors prior to
the meeting.
One or more of lha directors will swear
a statement of affairs of the company, which summarises the
assets and liabilities (including details of creditors' claims)
at a date not more than 14 days prior to the date of liquidation.
Copies or a summary of the statement of affairs wiil be made
available to creditors at the meeting. The insolvency practitioner
whom the shareholders nominated as liquidator will assist
the chairman of the meeting, who must be a director. A report
of the company's history up to liquidation will be presented,
giving an explanation of the reasons for the insolvency, and
creditors will be invited to question the directors.
The creditors then vote to appoint a
liquidator. The votes are based on the values of creditors'
claims. To be entitled to vote, creditors (other than those
present in a personal capacity) must have lodged a form of
proxy by the time and at the place stated in the notice of
the meeting. (You may send your proxy by fax.) Statements
of claim may be lodged at any time before voting.
Should the creditors' choice of liquidator
be different from that of the shareholders, the creditors'
choice prevails. A report of the meeting of creditors will
be sent to all known creditors within 28 days.
What are the powers of a liquidator?
A liquidator's powers are wide and include
powers to sell the company's assets, to bring and defend legal
proceedings and to pay dividends to the company's creditors.
Some of the liquidator's powers can oniy be exercised with
the agreement of the liquidation committee, the creditors
or the court.
Can the unsecured creditors form a liquidation
committee?
Yes. A liquidation committee may be appointed
at a creditors' meeting and must consist of at least three
creditors.
The liquidation committee receives reports
from the liquidator and may meet periodically. It assists
the liquidator, approves his remuneration and sanctions the
exercise of some of his powers.
Liquidation committee members are not
paid, but will receive their reasonable travelling expenses
as a cost of the liquidation.
Does the liquidator pay unsecured creditors
the money owed to them?
Secured and preferential creditors are
paid before unsecured creditors. Secured creditors are those
that have some form of security over a company's property
(for instance a bank with a fixed and floating charge debenture].
Secured creditors are entitled to be repaid their debt out
of the proceeds of sale of the secured assets in priority
to ordinary unsecured creditors.
Preferential creditors are a special
category of unsecured creditor. They include certain debts
due to employees, the Inland Revenue, HM Customs and Excise,
and the Redundancy Payments Service and are paid in priority
to all other unsecured creditors.
The liquidator will pay a dividend to
unsecured creditors if enough funds have been realised from
the company's assets after paying costs, secured creditors
and preferential creditors.
If you believe that you own something
in the company's possession, you should contact the liquidator
as soon as possible with full proof of ownership and be prepared
to identify what you are claiming. The liquidator will examine
your claim carefully before deciding whether to release the
goods in question, pay you for them, or otherwise.
When all the claims have been adjudicated
or provided for. the liquidator will declare a dividend. The
dividend will be a percentage (pence in the pound] of each
creditor's total admitted claim, based on the cash available
for distribution to the creditors and the total of all creditors'
claims. All unsecured creditors are treated equally.
Six months after writing off a debt in
your accounts, you can claim VAT Bad Debt Relief from HM Customs
& Excise for the VAT you have paid.
How do I make a claim in the liquidation?
The liquidator will write to all known
creditors asking them 10 suomii maims, lou must suunut your
claim to the liquidator in writing, providing sufficient supporting
evidence of your claim, eg copy statements, invoices, correspondence
etc. io allow the liquidator to decide whether or not your
claim is valid. Any costs incurred in submitting your claim
will not be reimbursed. Your claim does noi need to be on
a specific form. You may claim interest on your outstanding
debt up lo the date of liquidation if it bore interest, if
it was payable at a previous date under a written instrument,
or if you had previously demanded it in writing with notice
that you would claim interest. You will not get interest on
your claim accruing after liquidation, unless all creditors
are paid in full.
How will the liquidator adjudicate my claim?
The liquidator will compare your claim
to the company's records and any other available information,
and he may discuss the claim with the directors. The liquidator
may ask you for additional information or evidence if he thinks
you have not sufficiently proved your claim. For example,
if you have supplied goods to the company, the liquidator
may ask you to provide copies of signed delivery notes. The
liquidator may agree your claim in full, or in part, or he
may reject your claim if he does not think it is valid.
What can I do if I believe the liquidator has
unfairly rejected my claim?
It is best to contact the liquidator
in the first instance to discuss any amounts under dispute.
It you cannot reach agreement you can. within 21 days of rejection,
appeal to court. After 21 days, if you do not apply to court,
the adjudication is final.
Does the appointment of a liquidator prevent
a creditor taking legal action against the company?
No. Creditors may still pursue actions
against the company, although this might lead only to more
unsecured claims in the liquidation as creditors are not entitled
to enforce recovery. The liquidator may apply to court to
stay any proceedings.
It is only in certain specific instances
(for example if the company has insurance cover in place that
may be used to pay your claim or you claim ownership of specific
assets) that it may be appropriate to commence legal action
against the company. You should always take legal advice before
commencing any action against a company in liquidation.
Is the liquidator bound by contracts entered
into by the company prior to his appointment?
No, The liquidator may refuse to perform
or formally disclaim any onerous or unprofitable contract
entered into by the company prior to liquidation. The other
party will then have a claim for breach o( contract which
wilt rank as an unsecured claim. However, a a contracting
party that has acquired a beneficial interest in property
of the company will still be able to enforce it.
Is the liquidator liable for sums due under
contracts entered into by the company subsequent to his appointment?
The liquidator can cause the company
to enter into new contracts, in which event the associated
liabilities of the company rank as an expense of the liquidation.
As an unsecured creditor, what information am
I entitled to?
Within three months after the end of
the first year and of each succeeding year and on conclusion
of the liquidation, the liquidator must summon a meeting of
creditors. As well as sending a notice of the meeting to creditors,
it is usual for a liquidator to send a receipts and payments
account for the period and a report setting out his conduct
of the liquidation, which contains all the information that
will be available at the meeting.
How is the liquidator's fee determined?
The liquidation committee (if there is
one) or the creditors agree the liquidator's fee, failing
which it will be determined in accordance with the scale laid
down for Official Receivers or fixed by the court. Although
the tee can be fixed as a percentage of the assets realised
or distributed lot bothi. it it, normally based on the following
factors:
- the time properly spent by the
liquidator and his Staff.
- the complexity of the case;
- any exceptional responsibility
home by the liquidator:
- the effectiveness with which
the liquidator carries out his duties; and
- the value and nature of the
company's assets.
R3 is preparing a separate guide explaining
insolvency office holders' remuneration, which will be available
from the person who gave you this guide.
When is the liquidation complete?
The liquidation is complete when all
the assets have been realised, all creditors' claims have
been adjudicated (where there are sufficient funds) and net
realisations after expenses of the liquidation have been distributed
to the creditors.
To conclude the liquidation, the liquidator
will call final meetings of creditors and shareholders and
present his final receipts and payments account, together
with a report showing how the liquidation has been conducted.
What should I do if I am dissatisfied
with the liquidator's handling of the case?
You should first contact the liquidator
to try to resolve the problem. If you are still not satisfied,
you may be able to make an application to the court.
If you believe that the liquidator is
guilty of professional misconduct, you should contact his
recognised professional body (see below).
R3 is a centre of excellence representing
all those who work with under-performing businesses in the
UK. R3 does not license or discipline insolvency practitioners;
this is the responsibility of the practitioner's recognised
professional body. The RPBs are:
- The Association of Chartered
Certified Accountants
- The Association of Chartered
Accountants in England and Wales
- The Institute of Chartered Accountants
in Ireland
- The Institute of Chartered Accountants
of Scotland
- The Insolvency Practitioners
Association
- The Law Society
- The Law Society of Northern
Ireland (for Northern Ireland only)
- The Law Society of Scotland
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