Creditors' Voluntary Liquidation (CVL) - FAQ's

The liquidator is required to report any evidence of possible criminal offences that are uncovered while investigating a company's affairs to the prosecution section of the Insolvency Service. A decision is then taken on whether the matter should be referred to the Department of Trade and Industry's solicitors or other prosecuting authority to consider proceedings.

Examples of possible offences are:

• Companies Act 1985 – failure to keep proper accounting records or fraudulent trading.
• Insolvency Act 1986 – concealment of assets or material omissions from a statement of affairs.
• Company Directors Disqualification Act 1986 – a disqualified person or bankrupt acting or taking part in the management of a company.
• Theft Acts – misappropriation of a company's funds or assets for a director's personal benefit.
  The court may also make a disqualification order on the conviction of a director for a criminal offence in connection with the management of a company.

The liquidator will make a report to the court on the conduct of the directors and send a copy to them. The directors will have the opportunity to give the court explains or reasons for their actions – but may do so by a statement of truth (a written account of the relevant facts which is sworn on oath or affirmed, usually before a solicitor). There may be also statements of truth from other people (such as the company's bankers, accountants and creditors) presented as evidence to support the case for or against the directors. The court will then decide whether the conduct makes the directors unfit to act in the management of a company and, if so, for how long they should be disqualified.

Disqualification proceedings are taken under civil law, not criminal law. At any stage in the proceedings you may give an undertaking to the Secretary of State that has the same effect as a disqualification order and will put a stop to the court proceedings.

Notification of a decision to apply for a disqualification order will be sent to the last address you provided to Companies House or the liquidator. The application for disqualification has to be made within 2 years of the date of liquidation, unless the court extends the time.

Examples of conduct that may lead to disqualification include:

• Continuing to trade to the detriment of creditors at a time when the company was insolvent
• Failure to keep proper accounting records in accordance with the provisions of the Companies Act
• Failure to prepare and file accounts or make returns to Companies House
• Failure to submit tax returns or pay over to the Crown tax or other money due
• Failure to co-operate with liquidator

The liquidator has to send the secretary of state a report on the conduct of all directors who were in office in the last 3 years of the company's trading. The secretary of state has to decide whether it is in the public interest to seek a disqualification order. Any application is heard and decided by the court.

A disqualification order is made by the court under the Company Directors Disqualification Act 1986. The Act applies not only to a person who has been formally appointed as a director but also to those people who have carried out the functions of a director and to shadow directors. Without specific permission of the court, it disqualifies a person from:

• Acting as a director of a company
• Taking part, directly or indirectly, in the promotion, formation or management of a company
• Being a liquidator or an administrator of a company
• Being a receiver or manager of a company's property

An order for disqualification can be made under a number of different sections of the Company Directors Disqualification Act 1986 (see also section 4 - Criminal proceedings). The order will specify the period of disqualification. For orders made against an unfit director of an insolvent company, there is a minimum period of 2 years and a maximum of 15 years.

You cannot be involved in another company or business that has or uses a name which is so similar that it suggests that there is an association with the failed company. This restriction lasts for 5 years after the winding up applies:

• You were a director or shadow director (a person who gives instructions on which the directors of a company are accustomed to act) of the failed company in the 12 months before the date of liquidation
• To any name used by the failed company in that 12 months

The restriction does not apply if the other company had already been known by that name during the whole or part of the 12 month period and was not dormant in that time.

If you do not comply with this restriction or act as a director without leave of the court while an undischarged bankrupt or while disqualified, you may be held personally liable for the debts of the new or successor company. You may also be committing a criminal offence. If you believe these restrictions may apply to you, you should seek advice on you own position.

You can act as the director of another company unless you are subject to a disqualification order, have given a disqualification undertaking, are an undischarged bankrupt, or are subject to a bankruptcy restriction order or undertaking. A disqualified person must obtain the permission of the court to act as a director or to be concerned in the promotion, formation or management of a company.

The liquidation will continue until the liquidator is satisfied all assets have been realised and there are no matters outstanding that need to be investigated. The liquidation could therefore last for many years but most liquidations are concluded within 12-24months.

When the winding up is complete, a final meeting of members and creditors will be called and the liquidator will seek his release from office. Unless any members or creditors object the liquidator will automatically obtain his release. On release, the liquidator sends a notice to the Registrar of Companies and the company will be dissolved 3 months later. It then ceases to exist.

You may be required to contribute to the company's assets if you have misapplied company funds or if the company as traded wrongfully or fraudulently. If you are a shareholder of the company, you may be asked to make a payment for any shares that have not been fully paid up. If you, or any other person, have guaranteed any of the company's debts, it means that you have agreed to pay the debt if the company cannot. When a creditor becomes aware of the liquidation, you may be asked to make full payment subject to the terms of the guarantee.

Yes you have a duty to provide information and co-operate with the liquidator. Failure to co-operate is a serious matter and can result in an application to court for you to be examined, and a cost award can be made against you. If you do not attend the examination without giving the court a good reason, a warrant may be issued for your arrest.

Your failure to co-operate with the liquidator is a breach of the Insolvency Act and can lead to prosecution and a fine of £5,000. It will also be a factor in deciding whether you are fit to be a director. You also have a duty to ensure all the financial and statutory records of the company are forwarded to the liquidator. This is termed 'delivery up of the books and records' ordinarily this will be prior to the holding of the creditors meeting.

You will no longer have control of the company's business, assets and property. Most of your powers as a director will cease and, in general, you are no longer entitled to act for or on behalf of the company. Your duties and responsibilities to co-operate with the liquidator do not cease.

Once the board meeting has been held and it has been decided to convene the meetings of members and creditors trading should cease unless it has been agreed with the proposed liquidator that trading should continue to enable the better realisation of the company's assets.

Any deliveries of stock received after the board meeting should be held separately to one side until the appointment of a liquidator. In most circumstances monies received from book debts should be forwarded to the proposed liquidator to be held on trust until a liquidator is formally appointed. You will be advised if this is necessary. No further payments should be made to creditors.