Understanding creditors’ rights to form a liquidation committee
When a company is wound-up, whether via compulsory liquidation or a Creditors’ Voluntary Liquidation (CVL), a committee is sometimes formed to monitor the liquidator’s activities and look after the interests of creditors as a whole.
The purpose of the committee is to approve some of the liquidator’s actions in dealing with the process, and to fix the liquidator’s fee. A liquidation committee generally consists of between three and five members who represent creditor interests throughout proceedings, as well as assisting the liquidator with a range of tasks.
Why set up a liquidation committee?
The aim in establishing a liquidation committee is to ensure creditors have a ‘voice’ during the liquidation process. Creditors of an insolvent company often feel ignored in these circumstances, and that they have little influence on the proceedings or outcome.
Forming a committee can address this issue, and help to ensure proper consideration is given to their interests and financial recompense. It brings increased transparency to a potentially complex situation, and its members can provide invaluable help to the liquidator by acting as a ‘sounding board’ for future decisions.
Who is eligible to become a member?
The committee generally consists of either three or five members. An even number is avoided so there is no deadlock when voting takes place. To be eligible as a member, creditors must have a debt that is not fully secured, and be able to present clear proof that their debt exists.
It is often creditors with the most substantial claims who are nominated and elected as committee members - in a practical sense, they have the greatest financial interest.
Functions and duties of the committee
One of the main functions of the liquidation committee is to sanction certain actions by the liquidator.
- Paying any class of creditors in full, although no approval is needed for preferential creditors
- Entering a compromise or making arrangements with any creditor(s), or any debts of the company
- Taking security with regards to a debt
The liquidator’s remuneration is also approved by the committee. They review the liquidation accounts, which are submitted along with supporting documentation for various transactions that have taken place.
Meetings and procedures
Meetings of the liquidation committee are generally chaired by the liquidator. A suitably qualified insolvency practitioner may be appointed to take the chairperson’s place on occasion, maybe an experienced member of the liquidator’s firm, and this appointment has to be confirmed in writing.
An initial committee meeting must take place within three months of the liquidator’s appointment, or the committee’s formation. Future meetings may be called by committee members, and there is a time limit of 21 days from the request, for the meeting to take place.
Begbies Traynor specialises in corporate insolvency, and can offer professional guidance on the liquidation process. Our advice is confidential and unbiased, and with 37 offices around the UK, we are able to offer a same-day consultation to discuss your needs.