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What Does a Creditors’ Voluntary Liquidation Requires

Jul 17, 2020
What Does a Creditors’ Voluntary Liquidation Requires

A creditors’ voluntary liquidation, better known as CVL, is the most decent way to voluntarily liquidate an insolvent company. A company becomes insolvent when it can no longer pay its debts and the only course of action left is to liquidate it, thus protecting the interests of the creditors. Unlike a compulsory liquidation, a CVL is more regulated, giving the directors more control over the entire process.

Appointing a liquidator

Once you settle on the liquidation with an insolvency expert, the first step is to appoint a liquidator. During a creditors’ voluntary liquidation, the shareholders normally appoint and cover the cost of an authorized insolvency practitioner to perform the role of the liquidator.

The actual process of appointing a liquidator is rather short, as the whole matter can be settled within a couple of hours. According to Goldberg & Schulkin Law Offices, the appointment needs to be approved by the creditors at the meeting they would normally hold to discuss the liquidation, which usually takes place 3 weeks after the initial engagement.

The meetings

Liquidation is a legal process that requires a lot of coordination. For this reason, directors, shareholders, and creditors will meet several times. The meeting of directors will be held to confirm the company is insolvent, so a CVL must be initiated. This meeting can be called right away and the fewer directors there are, the faster the process will go.

The next meeting is the shareholders’ meeting which takes place right after the directors’ meeting. The shareholders must agree to the liquidation, so they can confirm the directors’ swift choice of the liquidator.

The same day, the shareholders meet to officially confirm the liquidation.  This step is mandatory, as the shareholders’ approval of a minimum 75% must be obtained before the liquidation goes through. Without this ¾ majority, the liquidation process cannot continue.

How the company’s assets are liquidated

Once the liquidation gets the go-ahead signal, it is time to sell the company’s assets. This process usually takes anywhere from 2 to 3 months, depending on the complexity of the case. If the voluntary liquidation process is complicated, this stage can last up to 2 years.

Speaking of the timing of a typical creditors’ voluntary liquidation, it is fairly fast-paced because there are clearly delineated deadlines all parties involved must meet. We’ve mentioned the requisite meetings but let us just say that the shareholders must be given two-week notice of the meeting. Even this deadline is fast for a legal procedure but if all the shareholders agree, the meeting can be held even sooner, which happens in most cases.

Once this stage is over, the directors have 7 days to deliver a notice to the creditors, calling them to vote on the resolutions passed. The decision date on these resolutions shouldn’t be earlier than 3 days after the notice is delivered and no later than two weeks after shareholders meet.

The cost of the entire process

Unlike the deadlines and the meetings that are usually punctual, determining the full cost of the liquidation process can be tricky. The reason for this is the existence of a number of variables directors, shareholders, and creditors cannot influence.

Firstly, there are few sans set costs but even these depend on local legislation, court decisions, and even the creditors' committee (not all voluntary liquidations have one). The directors have the power to negotiate a fixed fee for the liquidation. If an agreement is not reached, then the fee will be based on an hourly time cost.

Furthermore, the nature of the assets themselves has been known to cause problems because of immediate costs. Additional costs, both material and non-material, include the complexity of the case, the time spent by the liquidator on the case, the responsibility borne by the liquidator, and the effectiveness of the liquidator.

Do employees have rights during a CVL?

One a CVL is instigated, employees feel concerned and for a good reason. Liquidation threatens the continuity of business operations and it endangers all the jobs in the company. Luckily, each country has national legislation in place to protect the workers’ rights, ensuring they get paid and well-remunerated if they lose their job.

Do shareholders really need to meet?

The directors are the ones who instigated the creditors’ voluntary liquidation, so one might ask is it really necessary for the shareholders to hold a meeting as well. However, you need to know that the shareholders hold the voting rights in order to confirm the decision; without them, the liquidation cannot co through, as we have already stated.  They pass a special resolution agreeing to voluntarily liquidate the company’s assets.

Creditors’ rights

Apart from the employees, the creditors also have a set of undeniable rights. They might not be able to instigate a CVL. The creditors, however, are entitled to see the list of all of the company’s creditors and a summary of the statement of affairs at the meeting of creditors. Only then can they cast their vote to approve the liquidator.

Knowing all the details of a creditors’ voluntary liquidation ensures the whole process goes smoothly and that it is over quickly, with a couple of months. It is also important that all parties involved,  from the directors to the employees know what is going on and what stage is next, so they can exercise their rights and fulfill their duties.

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