Creditors’ Voluntary Liquidation

As the name suggests, it is a voluntary insolvency option for directors and shareholders of a company.

A CVL is a formal insolvency procedure in which an insolvent company (or LLP) ceases trading and is closed permanently. A CVL can only be entered into under the guidance of a licensed insolvency practitioner (“IP”). There are two main tests to determine whether a company is insolvent:

  • The “cash flow test” – a company cannot meet its liabilities as and when they fall due
  • The “balance sheet test” – a company’s liabilities irrevocably exceed its assets

We fully appreciate and understand that being faced with putting a company into an insolvent liquidation is a difficult position for any director to find themselves in. It is never pleasant to take the decision that a company needs to close its doors.

How can we help?

If your company is facing an uncertain future, creditor pressure is mounting and debts are increasing, it is vital that action is taken quickly and efficiently. Furthermore, it is imperative that you get independent and expert guidance as soon as possible. If you are unsure on the best way forward, you can arrange a free consultation with our sole IP in the strictest confidence. We are happy to help and can meet either at our offices or at a location that is convenient for you.

Regardless of the size of your business, our primary focus is providing directors with full details of the options available to them. These may include various insolvency options or the rescue of the company. Once we fully understand the problem, we will offer practical and constructive advice tailored to your specific circumstances. In most cases, hard and difficult decisions will need to be made. We are committed to providing you with all the information you need and to always be available to answer any questions you may have.

As a director of a potentially insolvent company, what should I do?

It is vital that you take advice from a qualified insolvency practitioner as soon as possible who will be able to talk you through the options available to the company. Once it becomes apparent that a company cannot be rescued and is no longer financially viable, it is often better for all stakeholders that any insolvency process commences as soon as possible.

A licensed IP will advise of possible actions that can be taken to remain compliant in your duties as a director of an insolvent company. Many directors choose to take independent legal advice because failure to act could place them in a situation where an action for wrongful trading or misfeasance may be commenced against them. This could put your personal assets at risk.

How will employees be affected?

Unfortunately, the company will cease trading and all employees will be made redundant. If employees are owed wages, holiday pay accrued but not taken, redundancy pay and pay-in-lieu of notice, they can make a claim to the Redundancy Payments Office (“RPO”). Subject to fulfilling relevant criteria, the RPO will make payments to employees and will apply relevant statutory limits. No such payments can be made until the company is placed in liquidation.

In certain circumstances, a director will be treated similarly to employees for any such monies owed.

What if I have provided personal guarantees?

If you have signed a personal guarantee (or “PG”) with a lender, the debt will not be written off as part of the CVL process. The responsibility for paying any outstanding amount of this borrowing will remain with you personally. You must be very careful not to treat such a creditor “preferentially”.

What are some of the key stages in a CVL process?

  1. Initial meeting with our insolvency practitioner including the provision of key financial information to consider the options available to the company
  2. Formal instruction including a Board Meeting of Directors or Decision of the Sole Director
  3. Notices to shareholders and creditors including drafting key documentation such as a Chairman’s Report and Statement of Affairs
  4. Shareholders’ meeting
  5. Creditors’ meeting (normally “virtual”) to consider various resolutions including the choice of liquidator(s) to deal with the liquidation to completion
  6. Appointment of liquidator(s) and company is placed in Creditors’ Voluntary Liquidation
  7. Liquidator(s) deal(s) with the liquidation until closure

What is the Liquidator’s role?

Work undertaken by the liquidator includes, but is not limited to, the following:

  • Realise all company assets
  • Liaising with secured, preferential and unsecured creditors regarding progress including whether there is any prospect of a distribution to any class of creditor
  • Dealing with employee claims (if any)
  • Investigations into the company’s affairs together with the conduct of the directors in the period leading up to the company’s insolvency
  • Agreement of creditors’ claims (where sufficient funds for a distribution)

What happens when the CVL process is complete?

Following receipt of the Liquidator’s final report at Companies House, the company will be dissolved. Unless personally guaranteed, any amounts owed to the company will be written off.

What are the advantages of a Creditors’ Voluntary Liquidation?

Some of the advantages of the voluntary option available to directors and shareholders include:

  • Quickly removes creditor pressure
  • Stops further legal action
  • Allows employees to claim monies due to them (subject to statutory conditions and limits)
  • Allows greater control over the cessation of trade and closure of the company
  • Creditors can submit their claims as part of this process
  • Avoids a public court case with creditors
  • Appoint the IP of your choice to deal with prior to the company entering liquidation
  • Potential reduction in reputational damage as seen to act proactively

What are the disadvantages of a Creditors’ Voluntary Liquidation?

Some of the disadvantages include:

  • An investigation into the directors’ (including shadow directors) conduct in the period leading up to the insolvency of the company
  • Any debt subject to a personal guarantee will be called upon
  • Insolvency is publicly advertised in The London Gazette
  • In many cases, creditors and shareholders will have to write off monies owed to them

What are the potential benefits of directors acting voluntarily?

Whilst we fully appreciate that placing an insolvent company in voluntary liquidation is a difficult decision to deal with, it may have the following benefits:

  • You have greater control over the liquidation process and are seen to take proactive action which may limit the damage to your reputation
  • You can work closely with shareholders to:
    • Set out the company’s financial situation in detail and the advice you have received from a licensed IP
    • Give them the chance to feed back any valuable input they may have
    • Explain why a proactive approach is needed
    • Maintain dialogue with shareholders throughout the process which may engender better relations both now and for the future
  • May reduce losses creditors face if action taken sooner and you are given the chance to tell creditors what actions were taken by the directors
  • Asset realisations may yield a greater return than in a compulsory liquidation
  • Directors and shareholders can liaise regarding the choice of IP
  • Liquidator will speak to creditors sooner which means unpleasant conversations with and letters from creditors may be much reduced when compared to a compulsory liquidation
  • Taking advice early regarding the insolvency of the company and acting upon such advice may reduce the scope for subsequent misfeasance actions against you personally regarding your conduct in the period leading up to insolvency
  • Comparatively quicker process than a compulsory liquidation which means that employees should receive any statutory monies they are owed sooner
  • Whilst not always, tends to be a less expensive option overall for all creditors

How does a Compulsory Liquidation differ?

A compulsory liquidation is one where one or more of the company’s creditors issue a winding-up petition to effectively force a company into liquidation as part of a court process. The Official Receiver is initially appointed to deal with the liquidation.

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