A CREDITORS VOLUNTARY LIQUIDATION (CVL) IS THE MOST COMMON FORM OF LIQUIDATION IN THE UK
It quickly removes creditor pressure.
Stops further legal action.
Allows employees to claim redundancy from the government.
Can allow you to continue trading under a different legal entity.
A quick, cost-effective way of closing down a company.
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What is a creditors voluntary liquidation (CVL)?
A CVL is a process that directors of an insolvent company initiate when they believe their company is no longer viable due to insolvency and, consequently, must stop trading.
When is a CVL appropriate?
Your company may be struggling, but when is it appropriate to put your company in a CVL?
- The company is insolvent and can no longer afford to pay its liabilities to creditors, staff wages, and other debts.
- The company has run out of cash or is having other cash-flow problems.
- The company is no longer viable and wouldn’t be even with a complete restructure.
- The directors don’t want to restructure the company and would rather liquidate.
- A market has changed or no longer requires the company’s products or services.
Once the process is complete, the company closes, cancelling leases, making staff redundant, and allowing directors to start a new limited company should they wish to.
So, if the above circumstances sound familiar and you’ve decided your company should enter into a CVL, what do you, as a director, have to do during the process?
The role of the director
As director of the insolvent company, you must call a shareholders’ meeting and inform the shareholders. The shareholders will appoint an insolvency practitioner (IP) to call a creditors meeting. At this meeting, an agreement is reached to appoint a liquidator, starting the process, and closing the company.
The director must provide all information required by the liquidator, including company books and records and any other documentation requested.
The role of the liquidator
As the liquidator, we will complete all paperwork and organise all creditor and shareholder meetings. During the process, we will collect any assets and, after deducting costs and fees, pay the realised collections to creditors on a pro-rata basis.
During the liquidation, we will:
- Realise business assets.
- Receive and process creditor claims to calculate how much is owed to relevant parties.
- Investigate the company’s directors (including shadow directors) and report their conduct to the relevant parties and authorities if necessary.
- Make payments to creditors on a pro-rata basis.
The CVL process
As director, you must act as soon as you realise the company is insolvent with no prospect of the position improving. Continuing to trade when you are aware your company is insolvent is ‘wrongful trading’. Doing so is illegal. It shows you haven’t considered your duty of care to your creditors, which can result in you losing your company’s limited liability protection, and even face criminal proceedings and a ban on being a company director.
As such, you should take decisive action as soon as you become aware the company cannot pay its debts.
- Speak to a licensed insolvency practitioner and meet with a consultant. They will review the company’s viability and liabilities, among other aspects, and advise on the best route forward.
- Call a shareholders’ meeting, informing them the company is insolvent and will not be able to repay existing creditors. If no other debt recovery options are viable, they should advise the company should cease trading through a voluntary liquidation.
- The shareholders will nominate a liquidator. Before the creditors meeting takes place, the liquidator will place an advert in The Gazette and two local papers. They will also write to all the company’s creditors.The purpose of this is to collate all claims of debts, so the liquidator can confirm the total amount owed and who needs paying after the sale of assets.
- At the creditors meeting, a liquidator is appointed by a vote. Creditors can elect to form a creditors committee to monitor the liquidation process and the liquidator’s conduct. There must be between three and five members within this committee.
Advantages of a CVL
- The creditors’ position will not deteriorate.
- Writes off the company’s unsecured debts.
- Avoids the risk of wrongful trading.
- The company will come to a formal close, leaving the director(s) free to start another business or pursue employment.
Disadvantages of a CVL
- Company assets tend to be sold for less than their balance sheet value, lowering the return to creditors who are already likely to lose money owed.
- No monetary return to shareholders.
- Any goodwill the director had will be lost, potentially harming those wishing to start again.
Close the Company and Start Again
A liquidator can sell the company’s assets in liquidation to former directors or shareholders who wish to set up a new company. The resultant company is called a phoenix company.
Phoenix companies are legal, provided all rules surrounding this type of company are observed, and in the creditors’ best interests.
By selling the assets to directors or shareholders, the liquidator must be able to confirm that:
- They have obtained the best value for the assets by using an RICS-qualified valuer.
- They have confirmed the trading name of the new company is not the same or similar to the liquidated company. If it is, additional rules must be followed.
There are potential issues for a phoenix company. Legal problems can arise, so directors should take advice before establishing the company. The company will require cash to operate but may not have employees to carry out work as the staff of the old company are not necessarily transferred to the new company via TUPE (transfer of undertakings), so they may lose valuable staff and have to recruit from scratch.
TUPE is legislation that states an employee’s contract (inc. salary, job title etc.) must remain the same.
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