What Is A Creditors Voluntary Liquidation (CVL)?

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What is Creditors Voluntary Liquidation?

A Creditors Voluntary Liquidation (CVL) is a voluntary process whereby the directors and shareholders of an insolvent business can place the company into liquidation. This usually occurs when the director believes that the company is no longer economically viable. In this instance, the creditors of the company must be considered a higher priority than the shareholders, and it is the duty of the liquidator to attempt to get the best return for creditors.

A company can only be placed into a CVL by a licensed insolvency practitioner, who will act as the liquidator. The liquidator has a duty to call and hold the necessary meetings and decision procedures, write to all creditors, conduct a statutory investigation, realise and distribute company assets, submit a conduct report to The Insolvency Service and remove the company from Companies House, once the liquidation has been concluded.

After a director signs notices to confirm that all directors are happy to proceed with the liquidation, the company can be liquidated within 2-3 weeks. After this, the shortfall owed to creditors, after any dividends are paid, is written off, and employees are able to make a redundancy claim for any outstanding holiday pay, wages, notice pay and redundancy pay. 

Personal Guarantees

In an instance where the director has signed a personal guarantee, these unfortunately are not written off in the liquidation, and the director who gave the personal guarantee will be liable to repay any sums owed. In these circumstances, there are options available to you should you not have the amount to hand. For more information, please check out our blog on Personal Guarantees.

When Would a CVL Be Appropriate?

A CVL is the best course of action when a business is struggling financially and beyond the point of rescue. In this instance, liquidating the company will stop debts from accumulating, as well as remove any pressure from creditors and prevent legal action from being taken against the Company.

As a director, you have a responsibility to minimize the liabilities of the company, and prioritise its creditors. If the company is only making losses, this may indicate that it should cease trading immediately, however, there are some circumstances where continuing to trade until the notices are signed, can increase the return to the creditors. If you are unsure about the course of action you should take, a licensed insolvency practitioner will be able to advise you and review the company’s financial position with you.

Directors can also place a company into a CVL if the directors no longer wish to run an insolvent business and a strike-off application has been objected to. As a CVL is instigated by the directors and shareholders of the company, creditors cannot object to the liquidation - although they can object to the appointment of the liquidator and vote for an insolvency practitioner of their choice to be appointed instead. However, this is unlikely to have a major impact on the procedure as by this time the company will have already been placed in liquidation.

Additionally, it is advisable to enter voluntary liquidation rather than being forced into a compulsory liquidation as a result of a winding up order, as once the director recognises that their company is insolvent, a CVL enables directors to wind up the company in line with insolvency legislation and the directors can set up future companies if they wish.

Employee Claims

After the date of liquidation, employees that are on the payroll (including any directors) will be able to make a claim to the Redundancy Payment Service (RPS) for any wage arrears, unpaid holiday pay, notice pay or redundancy pay that they are entitled to.

When being made redundant, and if there are more than 20 employees, employees are entitled to a consultation as to why they are being made redundant. If employees are not offered a consultation, or feel that they have not received a full explanation, they are entitled to bring employment tribunal proceedings.

A CVL is more beneficial for companies with employees, when compared to a strike-off application,  because a strike-off application is not a formal insolvency process, the RPS does not recognize it, and therefore employees will be unable to make a claim. You can find out more by reading our Purnells Guide to Creditors Voluntary Liquidation.

Furthermore, directors who are able to make an employee claim can then use funds received from the RPS to pay the statement of affairs fees in the event that asset realisations do not cover the liquidation costs.

What Happens After the Company has Gone into Liquidation?

Once the company has gone into liquidation, the liquidator will realise any and all assets that can be sold, write to the creditors and shareholders of the company, and if necessary complete annual progress reports. The liquidator also has a statutory duty to complete an investigation into the affairs of the company and submit a conduct report to The Insolvency Service. 

The director’s powers cease immediately on liquidation, and you will no longer be required to prepare confirmation statements or accounts on behalf of the company. If the director owes any debts to the company such as a director’s loan account, these will need to be repaid; however, the balance owed can be used towards the costs of the liquidation.

Once all aspects of the case have been closed out, any dividends that can be paid to creditors are distributed, the company is then dissolved – removing it from Companies House.

Directors can have a successor company, free of any debts, creditors and unprofitable property leases from the prior company, in certain circumstances.  However, you will be unable to use the same company or trading name or one that is too similar, as you could be held personally liable for the debts of the new company.

If you would like to discuss any issues raised in this article, please contact Chris Parkman on 01326 340579 or email: help@purnells.co.uk