Counting the cost of insolvency

The computer sector, particularly at the dealer level and the Var level, has historically been rife with one particular type of insolvency, the creditors' voluntary liquidation (CVL).

There are probably about five CVLs a week. Given the existing legislation, Insolvency Act and Company Directors Disqualification Act, the CVL is the most common way for directors and shareholders to deal voluntarily with their company's insolvency.

This is because it is in the interest of the directors to take action at an early stage in order to minimise the risk of personal liability for wrongful trading.

Unlike a compulsory liquidation, a CVL does not bring the directors' conduct under the scrutiny of the official receiver.

First meetings of creditors in CVLs are commonly known as Section 98 meetings. The main business at the first meeting is to appoint the liquidator.

There may also be resolutions to appoint a liquidation committee and the basis of the liquidator's remuneration (if there is no liquidation committee).

Although a liquidator will have been appointed by the shareholders before the creditors' meeting, that appointment can ultimately be confirmed or overturned by the creditors.

Section 98 meetings are perhaps the best attended of all of the creditors meetings in insolvency proceedings. Although a creditor may have suspected for some time that a company is in financial difficulties, frequently the first time a suspicion is confirmed is when the creditor receives a formal notice of the meeting.

This meeting is also the first, and sometimes only, opportunity creditors have to question the directors about the reasons for the company's failure.

The liquidator appointed at the meeting, who must be present, will ensure the creditors' concerns about the company and its directors are investigated.

At least seven days before the meeting is due to take place, all creditors will receive notification. This will provide details of the time and place of the meeting as well as the resolutions to be put to the meeting. If the resolution is to approve the basis of the liquidator's remuneration (as is usual), creditors will be sent a guidance note about their rights in relation to approving the fees. Creditors will also receive a proxy form. Corporate creditors and others not attending in person, should complete and return the proxy to the person convening the meeting by the date and time specified in the notice. A creditor should name one or more persons who can act as a proxy and may give specific or general voting instructions.

The following is just some of the information required to be given to creditors at a Section 98 meeting: a copy of the Statement of Affairs (detailing assets and liabilities), the company's trading history and reasons for failure, and a list of creditors.

Directors should obtain professional advice when considering whether the CVL is the most appropriate route out of the company's difficulties.

John Alexander and Nitin Joshi are partner and director respectively of Pannell Kerr Forster, accountant and insolvency practitioners for the computer sector.