What is Creditors' Voluntary Liquidation?
• To begin with:
Voluntary liquidation begins when the directors of a company decide so jointly and voluntarily or when the Court orders for it and makes it a compulsory step to be taken. In either case, a liquidator is appointed who ends the existence of a company and gets it dissolved.
• Liquidation: The types
i. Members' voluntary liquidation: This is when a voluntary decision for liquidation that can - after becoming solvent - can pay all its creditors in full.
ii. Creditors' voluntary liquidation: This is when a company is insolvent and is unable to pay fully to the creditors. Still, the liquidation occurs.
iii. Compulsory liquidation: Company is dissolved by order of the Court in case of insolvency, the action instigated usually by a creditor.
Corporate Insolvency: A brief note
The Insolvency Act 1986 S123 devises to check if a company is insolvent through two tests.
A. By checking if a company's realisable value in terms of its assets is more than its liability. This is inclusive of contingent (determined by conditions or circumstances that follow) liability.
B. If the company is able to pay its debts as and when they are due. If the answer to either comes in negative, then it is termed insolvent. This is when the directors will contact insolvency personnel, who will confirm insolvency and go through available options.
Creditors' voluntary liquidation: Elaborated
It's the joint decision by the directors of a company that triggers a creditors' voluntary liquidation. At this stage, a company is deemed insolvent and is held unable to continue trading. It's only the inside members of the company who are allowed to take steps to put it into Insolvency Accounting Firm and only the directors can time the decision. However, direct influences like by failure to obtain an adequate financing or the loss of a major customer also have a part to play.
The Insolvency Act 1986, under its wrongful trading provisions, imposes potential personal liabilities on the directors who allow a company to continue trading, even beyond the point of no return. In this case, directors can be persuaded to take the required decision earlier, in case there will be more funds available for paying the creditors.
A members' meeting follows once it's decided that liquidation should be undertaken. The directors will then instruct the insolvency personnel to arrange a meeting of members and creditors (under section 98 of the Insolvency Act 1986) to pass the resolution of placing the company in liquidation and for nominating a liquidator, who takes control of protecting the company's assets and disposing of its perishable goods. The individual meetings are ideally arranged on the same day; if not, then a two-week span is usually allowed.