The CVL Procedure
This is the procedure by which the shareholders of a company are able to place it into liquidation without any Court involvement. The following is a brief summary of how the procedure is initiated:-
The CVL starts with a meeting of the board of directors (convened because of the financial position of the Company), for the purpose of considering the proposed liquidation of the Company. At the meeting, resolutions are passed to convene a General Meeting of shareholders (“GM”) for the purpose of placing the Company into liquidation using the CVL procedure and to authorise the directors to prepare and sign the Statement of Affairs (“SoA”) for presentation to the meeting of creditors.
The notice required for the General Meeting is 14 days, but can be reduced provided at least 95% of the shareholders agree in writing. For the meeting of creditors a minimum of 7 days notice should be given, even though this is not specifically set out in the Ordinance.
It is a statutory requirement that one of the Company’s directors attend the meeting of creditors and act as chairman of the meeting.
Once the decision has been taken to convene meetings of creditors and shareholders, the directors are advised to take such steps as are necessary to protect the assets of the Company pending the meeting of creditors. These include, but are not limited to, ensuring that:
- between this time and the date of the meeting of creditors, no payments are made to anyone who is presently a creditor of the Company. Any payments made by the Company in the period immediately prior to the commencement of its liquidators will be reviewed and may be challenged by the liquidators who are eventually appointed.
- the Company’s assets are properly safeguarded. This includes avoiding any sale of the Company’s assets or transfer of funds or accounts receivable.
- any accounts receivable which are collected between the time the directors make the decision to liquidate and the date of the meeting of creditors are held to the order of the liquidators. They should not be paid into any of the Company’s overdrawn bank accounts or negotiated to any third party. Ideally they should be paid into a separate bank account with a bank which is not a creditor of the Company; and
- the books of account of the Company should be brought up to date prior to the commencement of the liquidation.
At the General Meeting, the shareholders will resolve to place the Company into liquidation and to appoint joint and several liquidators. The meeting of creditors, which is held immediately after the General Meeting, can then resolve to appoint its own liquidator or can confirm the appointment of the shareholder’s nomination.
The liquidators will then proceed with the administration of the liquidation. At this point, the powers of the directors cease, except to the extent that they are authorised by the liquidators to exercise any of these powers.
Once the liquidators have complied with their statutory duties, realised the Company’s assets and dealt with the proceeds according to the provisions of the Companies (Winding-up and Miscellaneous Provisions) Ordinance, the liquidators will call a final general meetings of sharehodlers and creditors for the purpose of concluding the liquidation.
Why Use The CVL procedure.
There are a number of reasons for using the CVL procedure as opposed to allowing a company to be placed into compulsory liquidation by a creditor. However, the two key issues are cost and timing.
In the compulsory procedure, there is a much greater level of court involvement than in the CVL procedure.This inevitably leads to delays and additional costs. Relatively straightforward matters, that in a CVL can be dealt with by way of a letter to creditors, instead have to go before the Court. This is particulary the case when it comes to dealing with the fees of solicitors who act for the liquidator. In a compulsory liquidation their fees have to go to Court for approval through the taxation process which often takes several months and frequently results in significant reductions in the costs that they are able to recover.
Shareholders and/or directors often wish to address the problems faced by a company sooner rather than later. A CVL can be commenced quite speedily compared with a compulsory liquidation, where it can take two or three months between the presentation of the petition and the winding-up order being made, even when the process is initiated by the shareholders and/or directors. Indeed, in exceptional circumstances, a CVL can be commenced on the same day if the directors are able to take advantage of the s.228A procedure.
In a compulsory liquidation all the proceeds of sale of the company's assets have to be paid into Companies Liquidation Account. These realisations attract Ad Val duty on a sliding scale which has the effect of reducing the amount available to be paid to creditors. Ad Val is not payable in a CVL.
At the end of the administration, the procedures for paying a dividend to creditors are less formal, less time consuming and therefore less costly.
In any event, the powers of a liquidator in a CVL are substantially the same as those in a compulsory liquidation with only one or two exceptions.
On balance, the CVL procedure is much more conducive to a quicker and greater return to creditors than is the compulsory liquidation procedure.
For a layman's guide to the CVL procedure you can visit the site of Briscoe Wong Advisory.