Creditors’ voluntary liquidation is initiated by the directors of the company and is then ratified by the members and creditors of the company. However, whilst the creditors’ voluntary liquidation procedure is voluntary (in that the directors are not being forced to recommend liquidation), it is usually the result of either outside creditor pressure or professional advice to the directors that the company is insolvent.

A company is Insolvent if it is unable to pay it’s debts as and when they are due and payable or its liabilities exceed its assets.

Directors are usually unwilling to put the company into liquidation as they always think that better times are around the corner. However, the threat of potential actions against them for fraudulent and wrongful trading usually concentrates their minds.

Directors can be held personally liable for all liabilities incurred if they continue trading the company after they know or should have known that the company was Insolvent.

The basic procedure for a creditors’ voluntary liquidation is as follows:

1. Meetings of members and creditors are convened by giving minimum 14 days notice. Additionally the Notice must be advertised in the London Gazette and 2 local newspapers if the assets are significant.
2. The directors prepare a Report and Statement of Affairs giving a brief history and reasons for the company’s demise and its financial position. This is given to the creditors at the creditors meeting and circularised to all creditors after the meeting.
3. A director has to make a Statement of Truth confirming that the Estimated Statement of Affairs is to the best of his knowledge and belief true
4. At the meeting of members they pass a Resolution to wind up the company and also nominate a liquidator
5. Both the Resolutions and the Statement of Affairs are filed with the Registrar at Companies House
6. Additionally the above Resolutions are advertised in the London Gazette and 2 local newspapers if the assets are significant.
7. The creditors’ meeting must be held within 14 days of the members meeting, although in practice the members meeting is held one hour before the creditors meeting:
   • there are minimum 7 days notice requirements for this meeting
   • creditors’ choice of liquidator takes priority over that of the members unless they ratify the appointment and appoint a Creditors Committee to oversee the actions of the Liquidator.
8. The appointment of liquidator is published in London Gazetteand filed with the Registrar at Companies House
9. The company’s assets are realised. Once creditor’s claims are agreed the balance, after Liquidators fees and expenses, is distributed to creditors in required order
10. Final meetings of creditors and members are held to approve the final resolution for the closure of the Liquidation.
11. Final return filed with Registrar at Companies House
12. Company is dissolved approximately three months later

A Statement of Affairs provides creditors with the following information:

1. Details of all the assets showing the cost and the amount to be realised
2. Details of all secured creditors and the amounts owed to them
3. The names and addresses of all other creditors stating whether they are preferential or unsecured and the amounts due to them

The duties of the liquidator in a creditors’ voluntary liquidation are essentially the same as those in a members’ voluntary liquidation. Again he is the agent of the company and the directors’ powers cease (but the directors are not removed).

The Liquidator will investigate the following:

1. The actions of the directors and then file his report with BIS within 6 months of appointment. This will either be a “clean report” or an “adverse report”. If it is an adverse report then the chances are the directors will be disqualified from acting as directors for a period of 2 to 15 years.
2. Wrongful trading. If the directors were trading wrongfully and the liquidator can prove this then they may be sued for all the company’s losses.
3. Whether or not the directors continued trading the company whilst knowing or should have known that the company was insolvent. They would only be responsible for the liabilities created during that period.
4. Sale of any assets at an undervalue. A liquidator can apply to court to have this overturned.
5. Preference payments, thereby requesting for the monies to be paid back
6. Illegal dividends. The shareholders will need to pay them back
7. Overdrawn directors loan accounts.

The directors have a duty to assist the Liquidator otherwise he can apply to court to:

• have them orally examined under oath or
• obtain a court order forcing them to comply with the Liquidators requests. Failure to comply will be Contempt of Court which may result in their imprisonment

The liquidator will be concerned to attack any past transactions which he feels are a preference and to investigate the actions of the directors in order to swell the fund of assets available to creditors. This Liquidation takes place where a company is insolvent. Therefore the assets are certainly not going to be enough to pay off the creditors in full. The liquidator is concerned to increase the pool of assets to get as big a return as possible for the creditors.

The Liquidator has a duty to do a report on the directors to the BIS under the Directors Disqualification Act 1986.