Company Closure Services
Creditors Voluntary Liquidation (CVL)
Creditors’ Voluntary Liquidation happens when shareholders and directors agree to place the business into liquidation because it can no longer pay its bills when they fall due.
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Who is a CVL for?
Creditors’ Voluntary Liquidation happens when shareholders and directors agree to place the business into liquidation because it can no longer pay its bills when they fall due. This is the most common form of liquidation in the UK.
All trading will cease and company assets are sold in order to repay creditors. Secured creditors with a fixed charge generally take preference, followed by insolvency practitioner fees and then ‘ordinary’ creditors or secured creditors with a floating rather than a fixed charge.
Benefits of a Creditors’ Voluntary Liquidation (CVL) for insolvent companies.
Outstanding debts are written off
Being unable to repay existing debts with no way of turning the company around is a stressful situation for any director. You cannot continue to trade if you are insolvent, and a CVL offers a way of dealing with these outstanding obligations in a way which aims to maximise returns for creditors.
Unless personal guarantees have been given for company debts, as a director you have no legal liability to repay monies owed by the business. Upon the company entering liquidation, any personal guarantees which have been given will crystallise and the responsibility for paying these associated borrowings will belong to the director/guarantor.
Legal action is halted
Any legal action against the company is stopped when the company is in liquidation. Again, as long as you have no personal liability for a company debt, creditors will be unable to take action against you.
Staff can claim redundancy pay
Members of staff will be made redundant by the liquidator, and if eligible, they can start their claim for redundancy pay and other statutory entitlements. If monies realised from the sale of company assets are not sufficient to cover redundancy payments, staff have an alternative route by which to claim what is owed. The National Insurance Fund pays out for redundancy, unpaid wages and holiday pay should the company not be able to do so using its own funds.
Leases can be cancelled
Terms on lease and hire purchase agreements are generally terminated at the date of liquidation, meaning that no further payments need to be made. If any arrears are owed, the company leasing the goods may be able to claim from the insolvency practitioners along with other creditors. It is worth noting here that personal guarantees are often given upon signing a property lease agreement; you should check your documentation carefully so you know whether you are likely to be made personally responsible for the remainder of the lease.
Relatively low costs involved
Company directors will need to fund the costs of arranging a Statement of Affairs and holding a creditors’ meeting, but apart from those upfront costs there may be little to fund, as professional fees are paid from the sale of company assets as long as these are sufficient.
You will need to hire a professional firm of insolvency practitioners to instigate both the Statement of Affairs and the creditors’ meeting.
Avoid court processes
By voluntarily choosing to liquidate the company, you can avoid being petitioned through the courts and be able to demonstrate to the public that liquidation was a company choice rather than a result of hostile creditor action.
Having identified some of the advantages of this type of company liquidation, let us now look at the main disadvantages of the process.
How does a CVL work?
A Creditors’ Voluntary Liquidation (CVL) is a formal insolvency procedure which involves the directors of an insolvent company voluntarily choosing to bring their business to an end, and wind the company up. Although the process is entered into on a voluntary basis, it often follows the cumulation of many months of financial distress when the possibility of a successful turnaround has been extinguished. Even though this is far from an ideal situation, for an insolvent company which has no viable future as a profitable entity going forwards, voluntary liquidation by way of a CVL may be the best solution for all concerned.
