Recent African startup closures have cast a spotlight on the harsh realities of the entrepreneurial landscape. Within these setbacks, one strategic tool stands out: creditors’ voluntary liquidation (CVL).
This in-depth guide aims to empower startup founders with the knowledge needed to navigate the complexities of shutting down a struggling venture. We’ll explore why CVL is chosen, the legal steps involved, and the impacts on various stakeholders. Drawing lessons from real-world cases, including WhereIsMyTransport’s formal closure, we aim to equip you with the tools to make informed decisions during challenging times.
What is Voluntary Liquidation?
Voluntary liquidation is a formal process initiated by a company’s shareholders to bring its operations to an end. This can occur when the company is either solvent or insolvent. There are two primary types of voluntary liquidation: Members’ Voluntary Liquidation (MVL) and Creditors’ Voluntary Liquidation (CVL).
1. Members’ Voluntary Liquidation (MVL):
Members’ Voluntary Liquidation applies when the company is solvent, meaning it has enough assets to pay off all its debts. Key steps include:
- Declaration of Solvency: Directors must declare that the company can settle its debts within 12 months. This declaration, made by a majority of directors within five weeks before the resolution to wind up, is filed at the Companies Registry.
- General Meeting: Shareholders pass a special resolution to wind up the company and appoint a liquidator.
- Liquidator’s Role: The appointed liquidator takes control, sells company assets, pays off debts, and distributes any surplus among shareholders. Annual meetings are held to update shareholders on the liquidation process.
2. Creditors’ Voluntary Liquidation (CVL):
Creditors’ Voluntary Liquidation is chosen when the company is insolvent, meaning it cannot pay its debts as they fall due. The process includes:
- General Meeting: Shareholders pass a special resolution for voluntary winding up. That is, the shareholders must approve the resolution by a special majority (usually 75%).
- Creditors’ Meeting: This meeting, usually held concurrently with the shareholders’ meeting, informs creditors about the company’s financial status. Creditors may nominate a liquidator, whose appointment takes precedence over the shareholders’ choice if different.
- Liquidator’s Role: The appointed liquidator manages the company’s affairs, realizes assets, and distributes proceeds to creditors according to legal priorities. Annual meetings are also held to update creditors on the liquidation progress.
Lessons from Zazuu and WhereIsMyTransport
WhereIsMyTransport:
In September 2023, African mobility startup WhereIsMyTransport opted for Creditors’ Voluntary Liquidation due to its financial inability to meet obligations. The liquidator oversaw asset realization and debt settlement, adhering to legal requirements.
Zazuu:
Following a $2 million funding round, African fintech startup Zazuu also entered Creditors’ Voluntary Liquidation amidst financial challenges. An insolvency practitioner managed the process, ensuring compliance with regulatory obligations and orderly closure.
Steps for Distressed Founders Considering Voluntary Liquidation
- Assess Solvency:
- Conduct a comprehensive review of the company’s financial position to determine if Members’ Voluntary Liquidation (MVL) or Creditors’ Voluntary Liquidation (CVL) is appropriate.
- Prepare a Declaration of Solvency if opting for MVL.
2. Convene Shareholder Meeting:
- Call a general meeting to approve the resolution for voluntary winding up.
- Appoint an authorized insolvency practitioner as the liquidator.
3. Creditors’ Meeting (for CVL):
- Notify creditors of the company’s financial status and intention to liquidate.
- Allow creditors to nominate a liquidator, whose appointment may override the shareholders’ choice.
4. Role of the Liquidator:
- The liquidator assumes control of the company, sells assets, pays off creditors, and distributes any remaining funds to shareholders.
- Conduct regular meetings with shareholders or creditors to provide updates on the liquidation progress.
5. Final Steps:
- Once all debts are settled and assets distributed, the liquidator convenes final meetings of shareholders and creditors.
- The company is dissolved, and its legal existence ceases. In the UK, the company is dissolved after this final meeting. In Nigeria, dissolution occurs three months after the Corporate Affairs Commission (CAC) approves the liquidator’s final accounts.
In summary, the process involves:
- Board Resolution: The company’s directors pass a resolution to initiate CVL.
- Shareholder Approval: Shareholders approve the resolution by a special majority (usually 75%).
- Appointment of Liquidator: A licensed insolvency practitioner is appointed as the liquidator.
- Collection and Realization of Assets: The liquidator collects the company’s assets and sells them to generate cash.
- Distribution to Creditors: The liquidator distributes the proceeds to creditors in a specific order of priority.
- Dissolution: The company is formally dissolved.
Legal and Tax Implications
- Director Responsibilities: Directors must cooperate fully with the liquidator, providing accurate financial information and handing over company assets. In both Zazuu and WhereIsMyTransport cases, directors were required to provide comprehensive information about the company’s affairs, including books, records, and assets. This ensures that the liquidator can efficiently manage the liquidation process and maximize returns for creditors. Directors must also attend interviews with the liquidator as required and hand over all company assets and documents.
- Tax Considerations: Address potential tax liabilities such as Capital Gains Tax on asset disposals and withholding tax on distributions to shareholders during liquidation. Usually, asset disposals may trigger capital gains tax if sold above their acquisition cost (mostly taxed at 10% of the gain). Distributions to shareholders could also attract withholding tax. The liquidator must navigate these tax implications, ensuring compliance with relevant tax laws. Additionally, any ongoing audits must be expedited, or a tax health check conducted to determine potential liabilities.
- Continued Operations: If the company continues to trade during liquidation, maintain separate accounts for these activities under the liquidator’s supervision.
Voluntary liquidation, whether through Members’ Voluntary Liquidation (MVL) or Creditors’ Voluntary Liquidation (CVL), offers a structured approach for distressed African startup founders to wind up their businesses. By understanding the process and fulfilling legal obligations, founders can navigate this challenging phase effectively. The experiences of Zazuu and WhereIsMyTransport serve as practical examples, highlighting the importance of proactive decision-making and compliance in company closure.
