Creditors Rights and Duties in a CVL

When a company cannot repay its debts and there’s no prospect of recovery, there may be no choice but to cease trading and wind up the business. The company directors can voluntarily initiate the process by proposing a creditors’ voluntary liquidation (CVL).

A CVL allows the company to liquidate its assets and close the business. Creditors’ rights and duties in a CVL are vital to the smooth running of the process. By exercising their rights, creditors also protect their interests.

Company Directors Review

Before proceeding, directors should review their position with a licensed insolvency practitioner (IP). The IP will assess the situation and determine the best course of action. If rescue is impossible, the IP will recommend a CVL.

Initiation of the CVL

Once a CVL is deemed necessary, directors meet with shareholders to pass a special resolution to wind up the company. 75% of voting shareholders must agree to the resolution for it to pass. Creditors are informed of the meeting and given full details of the company’s financial position.

Appointing the Liquidator

The CVL process must be handled by a licensed insolvency practitioner who acts as the liquidator. If you haven’t consulted an IP prior to this stage, you must appoint one now. Once the CVL is initiated, the liquidator takes complete control of the company and the CVL process.

Creditor Rights and Duties in a CVL Process

• An important part of the creditor rights of a CVL is their right to reject the director’s choice of liquidator and nominate an IP of their own, if they deem it appropriate.
• Creditors must give the liquidator full details of their claim and provide proof of the debt and any information the IP requires in a timely manner.
• Creditors must receive regular updates from the liquidator regarding the sale and value of assets and the distribution of the proceeds. This can be done via a creditors committee (up to 5 members) who liaise between the IP and the rest of the creditors, should they so choose.
• Creditors should fully cooperate in the liquidation procedure by participating in meetings and voting on aspects of the process as required.

Reimbursing Creditors

The liquidator values all company assets and sells them for the best possible price. The proceeds are used to pay off company debts.

It’s important to note that creditor rights of a CVL don’t extend to a guaranteed payment. Funds are allocated according to a set order of priority.

1. Secured Creditors – often an asset-based lender such as a bank.
2. Preferential Creditors – usually company employees.
3. Unsecured Creditors – customers, suppliers and contractors.

Those lower down the list may receive very little, if anything, depending on the money raised and the amount of debt to be repaid overall.

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