5 Mins
In Scotland, there are two types of insolvent liquidations for companies, a Creditors’ Voluntary Liquidation (CVL) and a Court Liquidation (which is also referred to as a Compulsory Liquidation). The end result is the same in both cases, but there are some differences, particularly around the appointment process which means that in certain circumstances only one process is applicable or one process may be more appropriate than the other.
Why choose a Creditors’ Voluntary Liquidation?
Despite having “creditor” in its name, this option is not open to creditors. It is the company that drives the process. The company will seek the advice and assistance of a qualified Insolvency Practitioner (IP) to assist with this process and an IP must agree to act as Liquidator.
Insolvency legislation* lays down the CVL process. Once the Directors have resolved that the company is insolvent and should be wound up, any Qualified Floating Charge Holder is first given notice and a meeting of Members is called to resolve to wind the company up and appoint a Liquidator. The nominated IP will assist the Directors in requesting a decision of creditors and a report on the company, a Statement of Affairs and other documents regarding the appointment of a Liquidator and the lodging of claims will be issued to creditors. Creditors can nominate their own choice of Liquidator if they do not wish for the Members’ Liquidator to be appointed. There is a prescribed timeline for all of these actions to take place.
The two main reasons for a CVL appointment are cost and control. The CVL route avoids the costs of having a Petition prepared by a solicitor and lodged in Court. In addition, companies often feel they can control the process better as they have a say as to who will be appointed Liquidator and when. It should be noted that regardless of whether it is the IP the company appoints, or an alternative IP appointed by the creditors, the subsequent actions of the Liquidator in office will be exactly the same, as dictated by legislation.
Why choose a Court liquidation?
The alternative route into liquidation is a Court process which can be started by the company, directors or creditors where a company is regarded as being unable to pay its debts.
Petition by company or directors
Having resolved that the company is insolvent and producing a Statement of Affairs to evidence this, a Petition may be instructed by the company or directors.
Petition by creditors
Any Petition by a creditor must demonstrate that the company is due a debt which it has failed to pay. Generally, the creditor will have already obtained a Decree from the Court and will then serve a Charge for Payment on the company. If the period of the Charge for Payment expires without payment, this can be used as evidence of the company’s failure to pay its debts. The creditor must also have consent to act from a qualified and bonded IP which will be lodged with the Petition. Sometimes this Decree process is circumvented by a creditor by the service of a Statutory Demand instead. Again, on the expiry of this with no response, a Petition can be lodged.
This action by a creditor should not surprise a company as the creditor will have taken strenuous steps to secure payment prior to this and often the receipt of a Decree will prompt a company to reconsider its viability and seek to place itself into liquidation.
Once a Petition is served, the company must either pay the debt and costs of the process in full or give sufficient reason to the Court why the debt is not due. If it cannot, then the company will be placed into liquidation by the Court.
Appointment process
The Court Liquidation route is chosen for many reasons but the main one is usually the speed of appointment. Depending on the Court schedule, the liquidation process can start the same day the Petition is lodged.
If there are matters that need to be dealt with immediately which cannot wait for a Winding Up Order to be granted (e.g. concern about the dissipation of assets, perishable stock to be sold or employees to be made redundant) a company or creditor may request a Provisional Liquidator be appointed in the Petition and this appointment will be made by the Court if shown cause.
If there are no urgent matters to be dealt the Court starts the process to appoint an Interim Liquidator. The Sheriff usually directs the Petition to be served on the company at its Registered Office and advertised to ensure all company officers are aware of the proceedings. After the expiry of the designated objection period, usually 8 days, the Court reconsiders the Petition and a Winding Up Order appointing an Interim Liquidator is granted. The Interim Liquidator then seeks to have a Liquidator appointed who is, more often than not, the same IP.
Which is the best or correct route to take?
This is wholly dependent on the circumstances of the company in question. Any company that believes it is insolvent would be wise to seek the advice of a licensed IP as soon as possible as, following their review of the company’s position, they will be able to present the pertinent information and options to the company to allow it to make an informed decision.
* Companies Act 2006 / Insolvency Act 1986 / Insolvency (E & W) Rules 2016 / Insolvency (Scotland) (Receivership & Winding Up) Rules 2016.