What Is A ‘Statement Of Affairs’ In A CVL Process?
A Creditors Voluntary Liquidation (CVL) is a formal insolvency process initiated by the directors of a limited company to place their company into liquidation when it is unable to pay its debts as they fall due (i.e. insolvent). It should not be confused with a Members Voluntary Liquidation (MVL), which is a formal process by which a solvent company is wound up.
A key step in placing a company into CVL is the preparation and verification of a Statement of Affairs. For a more general overview of the steps to place a company into CVL please read our previous article entitled ‘How Do I Place My Company Into Voluntary Liquidation’.
A Statement of Affairs provides a snapshot of a company’s financial position (assets and liabilities) at a specific date and should reflect an overall deficiency to creditors and shareholders. This supports the decision of the directors that the company is insolvent as the realisable value of assets will be insufficient to discharge all liabilities.
The Content Of A Statement Of Affairs
1. Summary of Assets
One of the key roles of an Insolvency Practitioner (the Liquidator) in the CVL scenario is to maximise the realisation of assets for the benefit of creditors.
Accordingly, in the pre-liquidation phase, the Insolvency Practitioner will review the available records and work with the directors to understand what assets are owned by the company, what the book value of those assets are (usually by reference to previous financial statements), what the estimated realisable value of the assets could be in the liquidation, and whether those assets are subject to any security.
2. Summary of Liabilities
It is equally important for the directors to disclose the Insolvency Practitioner details of all the company liabilities, including contingent liabilities, as these are parties that will be affected by the CVL process.
On the face of the Statement of Affairs, the different types of liabilities will be categorised and correctly ranked as either Secured Creditors, Preferential Creditors, Secondary Preferential Creditors, Floating Charge Creditors or Unsecured Creditors pursuant to insolvency legislation. The Insolvency Practitioner will advise the directors on how each liability ranks in a CVL scenario as this is relevant for determining who gets paid first in the CVL.
3. Creditor Details
Appended to the Statement of Affairs will be a list of creditors, including their name, address, the amount owed to them and details of any security held. It is also necessary to complete a separate schedule of any employee claims and consumer creditors.
4. Shareholder Details
Similarly, a schedule of shareholders will have to be enclosed including their name, address and number of shares held.
Who Signs The Statement Of Affairs?
As soon as the Statement of Affairs has been approved by the directors it should be verified by way of a Statement of Truth, or an affidavit for companies registered in Scotland. In all cases, the Statement of Affairs should be verified by all or the majority of the directors.
Where Is It Sent?
As soon as the Statement of Affairs has been verified by the directors it is sent to all known creditors in the pre-liquidation phase. The idea here is that creditors have a rough idea of the financial affairs of the company before the necessary decision date to appoint an Insolvency Practitioner as Liquidator. All accompanying schedules, including details of employees and consumer creditors, will also have to be sent to creditors at this stage.
A written report in respect of the financial affairs of the company, including any relevant notes to the Statement of Affairs, must also be prepared as a separate document and made available to creditors. This report will be drafted by the Insolvency Practitioner based on the information provided by the directors.
Following the decision date and the appointment of the Liquidator in the CVL, he/she will have to file a copy of the Statement of Affairs at Companies House, which is a public record. The schedules detailing the employees and consumer creditors will be taken out for this purpose.
How Quickly Does It Need To Be Prepared?
Insolvency legislation dictates that the Statement of Affairs must be prepared “before the end of the period of 7 days beginning with the day after the day on which the company passes a resolution for voluntary winding up”. For example, if a meeting of shareholders has been convened for 7 April with a view of passing a resolution to place the company into CVL, the Statement of Affairs must not pre-date 1 April.
The Statement of Affairs must be delivered to creditors at least one business day prior to the decision procedure; the process initiated by which creditors are asked to nominate an Insolvency Practitioner to act as Liquidator. The written report in respect of the financial affairs of the company must also be made available to creditors at least one business day prior to the decision procedure.
In many instances where a company is struggling and under pressure from creditors, such as being threatened with legal action or a winding-up petition – urgent action is required. In such circumstances, an Insolvency Practitioner may be instructed to assist the directors in taking steps to place a company into CVL as soon as possible. This could be in as little as 7-14 days from the date of the initial conversation. Depending on how complex the financial affairs of the company and the quality of the accounting record maintained, adhering to these deadlines can be challenging but it is not negotiable. If the deadlines are breached, the process must start over.
Implications Of An Incorrect Statement of Affairs
It is important to emphasise here that the Statement of Affairs is only intended to be the directors best estimate of the company’s financial position. If good quality accounting records are maintained, the Statement of Affairs is likely to present a more realistic position for the benefit of creditors.
If there are small errors made in the preparation of the Statement of Affairs, such as some immaterial difference in the creditor balances or the director innocently underestimating the realisable value of an asset, there are no drastic consequences for the directors. However, if the Statement of Affairs is subsequently proved to be materially inaccurate or misleading this could be more serious.
In a CVL process, the Insolvency Practitioner is required to review/investigate the financial affairs of the company and the conduct of its directors. In respect of the latter, an independent submission is made to the Insolvency Service which highlights any cause for concern. Should the Insolvency Service see fit, they can seek a disqualification order or an undertaking against the directors, which prevents them from being involved in the promotion, management, or formation of any other business for a period of 2-15 years. Material inaccuracies within the Statement of Affairs is one such cause for concern considered by the Insolvency Service.
Would You Like Some More Information?
If you are considering a CVL process or would like some more information in respect of the Statement of Affairs specifically please do not hesitate to contact us.