Creditors’ Voluntary Liquidation (CVL) – The Basics Explained

NEWS & BLOG

NEWS & BLOG

A Creditors’ Voluntary Liquidation (CVL) is where the directors of an insolvent company voluntarily decide to bring their business to an end. This formal insolvency procedure will effectively wind the company up.

This isn’t a decision that’s normally made easily, or early on in the evaluation process. It often comes after all other avenues have been exhausted. The best outcome is usually to save a business from closure, but when there is no viable profitable future, or the historical issues are too great, voluntary liquidation by way of a CVL can often be the best alternative outcome.

Going through any such situation can be very stressful, therefore it is always recommended that you seek support and guidance from an experienced insolvency specialist.

What happens with a CVL?
Trying to save a company from insolvency is always the preferred option, but there are times when winding up a company through voluntary liquidation becomes the best solution. This allows for directors to move on and pursue more lucrative employment options, and it also enables creditors to potentially receive some of their money back, as all the company assets are sold and the liquidation costs are paid, the balance is split out between them.

Through a CVL, the company will be closed, and any outstanding debts will be dealt with as part of the process by the liquidator.

Entering a CVL
A CVL can only be undertaken with the guidance of a licensed Insolvency Practitioner. It is always advisable to speak to an Insolvency Practitioner at the earliest possible stage. This means you can be given the best advice and support, and you will have the largest range of options available to you. Insolvency Practitioners normally strive to rescue a business wherever possible. CVL is only one outcome, there may be many more positive solutions that can be explored.

It is only if the business is beyond rescue, or the directors and shareholders make a proactive choice to close the business, that CVL is the right route to choose.

Once the directors have made this decision, working alongside their Insolvency Practitioner, they will then hold a general meeting of the shareholders and issue creditors with notice of their intention to enter into liquidation. CVL is a formal procedure and an experienced Insolvency Practitioner will guide the directors through the process that must be followed in order to place the company into liquidation.

What happens to the employees?
There is a Government backed scheme whereby employees of an insolvent company will receive some of the money due to them in respect of any arrears of wages, outstanding holiday pay, pay in lieu of notice and redundancy. There are restrictions that apply, but normally a long standing employee will receive some compensation for the work and dedication they have shown to the company. In certain cases, directors who are also employees can access the scheme too.

Will I have to pay the creditors after CVL?
When a company enters a CVL, the chances are there will be a significant shortfall to creditors, even though there will be an attempt to maximise the value of the assets to provide a return for them. Any shortfall will be written off upon the company being liquidated and there is no legal obligation for the directors to continue to pay the company creditors. The only exception is for company debts that have been personally guaranteed (PG). Where anyone has signed a PG, the responsibility for paying a debt will remain with that person and will not be written off.

Following a CVL
A liquidation generally takes about 12 to 18 months to complete. Once it is concluded, the company will be removed from the register at Companies House and it will cease to exist. However, once a liquidator is appointed, the directors are free to move forward with their future plans. They do not have to wait until the liquidation is formally concluded.

During the liquidation, a liquidator has many statutory duties to perform, but these can be summarised into two basic tasks. The first is to review the action of the directors to make sure nothing untoward has occurred. The second is to maxmise the value of assets for the benefit of creditors. In those rare cases where unlawful actions are uncovered, this may lead to directors being found guilty of wrongful trading, fraudulent trading or misfeasance. This could result in the directors being held personally liable for some or all of the company’s debts, but it is more likely that they may be disqualified from acting as the director of any company for a period of 2 to 15 years.

Can I start up again?
The simple answer is yes. Putting a company into CVL does not prevent you starting a new business or, having understood the issues why your present company is facing difficulties, re-starting your current business without the burden of the historical issues. This is also known as a “phoenix company”. If you are considering this option, it is important to take advice from an Insolvency Practitioner to make sure that you do this in the correct way and do not fall foul of the many pitfalls that exist.

It is always advisable to seek out professional support as early as possible, giving you the best chance of finding the optimum solution for you and your business. If you’re facing financial difficulties, please speak to one of the team at BLB Advisory. We are ready to help.

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