A Creditors Voluntary Liquidation (CVL) is a formal insolvency procedure used to close a company that has reached a position of insolvency. If your company’s debts have become unmanageable and pressure from creditors is unbearable, it can be overwhelming. If you have decided you want to effectively ‘shut up shop’ and put an end to the worry and sleepless nights, a Creditors Voluntary Liquidation (CVL) may be the solution to your company’s financial difficulties.
WHAT IS A CVL IT AND HOW CAN IT HELP MY COMPANY?
Creditors Voluntary Liquidation is the most common form of Liquidation in the UK. A company that has decided to implement a CVL generally has little or no cash flow, which in turn makes it difficult for it to pay its debts as and when they fall due. A Creditors Voluntary Liquidation is usually the last resort for a company as it is insolvent and cannot continue trading.
As the name suggests, the process is a voluntary option for Directors and Shareholders to bring an end to worries regarding company debts quickly and professionally. It should not be confused with Compulsory Liquidation, which is the process where one or more of the company’s Creditors issue a Winding up Petition to the Courts and effectively force the company into Liquidation.
The decision to propose that the Company be put into CVL is initially made by the Directors, however it is the Shareholders that have to pass the relevant resolutions. The Directors will hold a quorate board meeting (generally requiring a minimum of two Directors present and voting) to confirm that a CVL is the most appropriate route. The Director(s) will then, with the assistance of the Proposed Liquidator, call a meeting of the Shareholders to consider the resolutions to put the Company into a Creditors Voluntary Liquidation.
When the Directors decide that CVL is the best way forward, the company will generally cease trading immediately. It is imperative that the company does not take on any more credit or incur further liabilities at this stage as this could be considered as worsening the Creditor’s position. If there are any assets, these should be safeguarded pending the appointment of a Liquidator. These will then be realised by the Liquidator upon their appointment and after costs are deducted, any remaining funds are then distributed to the company’s Creditors in the order of priority set out in insolvency legislation.
It may be possible for Directors/Shareholders or other parties connected to the company (ie employees) to acquire the assets of the company at market value and continue trading in the same line of work. If you have any interest in purchasing the assets, you should advise the proposed Liquidator and submit a formal offer. Assuming that the offer is in line with market value, and no other higher offers are received, the sale can be completed on the appointment of the Liquidator after the Creditors meeting. This is often referred to as a Pre-Pack Liquidation.
There are strict controls regarding re-using company trading names, however this can be explained in further detail if required.
WHAT ARE THE ADVANTAGES OF A CVL?
WHAT ARE THE ADVANTAGES OF A CVL?
It is never pleasant when a company needs to ‘close its doors’; however, if it becomes apparent that a company is no longer viable and cannot be rescued it is often better for the Directors and Creditors if a Creditors Voluntary Liquidation (CVL) is commenced as soon as possible.
- It gives Directors an opportunity to deal with the company’s insolvent position quickly and professionally.
- It gives Directors a clean break, allowing them to move on.
- By ceasing to trade the company upon the realisation of insolvency, the Directors reduce the risk of wrongful trading.
- Enables Creditors to submit their claims in a controlled manner.
- Liquidation does not affect the Directors’ ability to be a Director of another company (unless a subsequent disqualification order is made).
- Employees that are made redundant as part of the company’s Liquidation will still receive any redundancy payments due to them from the Redundancy Payments Office (subject to limitations).
- It can be possible for the Directors or Shareholders to purchase the company’s assets at market value and trade again in a similar line of business.
Whilst a Creditors Voluntary Liquidation (CVL) can seem a drastic measure for your company, the Directors of an insolvent business must take action immediately once they become aware the company is unable to pay its debts as and when they fall due. Failure to do so could put the Directors of an in a situation where an action for wrongful trading may later be taken against them which puts their personal assets at risk. Early action by Directors can prevent this.