The implications of voluntary liquidations post-Covid

The Insolvency Service’s statistics for January 2022 reported 1,560 company insolvencies in England and Wales, and shows a huge split between 1,358 company instigated creditors’ voluntary liquidations (CVLs) and just 118 compulsory liquidations started in court by creditors. The latest CVL figure is 122% up from January 2021 and 34% up on the pre-pandemic equivalent in January 2020. A CVL is used to put a company into liquidation without a formal court process but the court’s absence does not mean that directors can, or will, escape scrutiny that many think only follows a winding-up order. The CVL process starts with shareholders passing a special resolution that the company be wound up after directors determine that the company is no longer financially viable and won’t be able to pay all its creditors – a judgment they have to consider as soon as they realise the business is in financial difficulty to avoid breaching their statutory duties. Directors mindful of that risk and looking to cover themselves will often seek external advice on the crucial question of whether or not there is a reasonable prospect of avoiding insolvency. The company’s accountants are typically the first port of call and any advice they give should make it clear that a CVL is not an ‘easy’ option that will avoid a review of the directors’ conduct and decision making. Although shareholders (often also directors) typically nominate a liquidator, their choice doesn’t mean that the liquidator will approach the liquidation in any less rigorous way than they would normally do. Liquidators have statutory obligations to investigate a company’s affairs, along with its directors’ conduct, and make a confidential report to the Secretary of State (for Business, Energy and Industrial Strategy) on their findings. If they identify director “unfitness”, the report usually triggers an investigation by the Insolvency Service, which could ultimately lead to disqualification proceedings. All of a liquidator’s options to explore claims against directors for fraudulent trading, wrongful trading, misfeasance (for breaches of directors’ duties) remain open in a CVL, as do claims to recover balances on any overdrawn directors’ loan accounts as well as actions to challenge transfers at low values and preference claims. Directors considering their options should also be advised on the impact of recent changes to the director disqualification regime introduced on 15 February 2022 by the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 which extend the Insolvency Service’s powers to investigate the conduct of directors of dissolved companies. It used to be the case that to bring such proceedings, the company had to be restored to the Register of Companies. That typically took a number of months and added additional costs. Now, the Insolvency Service can issue proceedings against directors of dissolved companies without having to take those steps, and, perhaps most importantly, can bring disqualification claims up to three years after the company’s dissolution. The changes have been introduced to discourage directors from using the dissolution process as a way to avoid potential scrutiny (and liability). They should deter directors juggling with post-Covid debt laden balance sheets into thinking that circumventing a shareholders’ CVL resolution will allow them to avoid a liquidator and all of their powers. Whilst directors must take account of their responsibilities to creditors and act in their interests when insolvency looms, they should also remember their duties to the company and its shareholders who, like liquidators, can ask the court to examine directors on their conduct and potentially order them to make repayments to the company or contribute to its assets in view of any breaches of duty. Simon Walsh, Partner, and Helen Young, Associate in the Commercial Litigation and Dispute Resolution Team at SA Law