When businesses face the challenges of poor cash flow and owe unpayable debts to creditors, the directors may choose to pursue a Creditors Voluntary Liquidation (CVL).
Compulsory Liquidation is when a company is forced to liquidate by a court. The company’s shareholders instead agree upon a CVL as the best course of action to dissolve the company.
Shareholders would need to cast a vote to agree to the CVL. After this, the business will stop trading and sell off its assets.
In this guide, we talk about Creditors’ Voluntary Liquidation, what it means to enter a CVL and the help you can get if you decide to enter a CVL.
What is a Creditors Voluntary Liquidation?
Creditor Voluntary Liquidation (CVL) is a formal insolvency procedure that offers the company a chance to make itself insolvent voluntarily.
The reason why a company will go into a CVL would be because they are unable to manage the pressures from creditors to pay their debts.
If this is the case, then a unanimous decision by the company’s directors and shareholders will need to be made to end and close the company.
How can a Creditors Voluntary Liquidation (CVL) benefit my company?
Creditors Voluntary Liquidation (CVL) is common practice for UK companies who want to make their companies insolvent.
The key is that the directors will voluntarily make their company insolvent, meaning that it will end the worries of company debts.
In addition, you are choosing to liquidate means that you can find your insolvency practitioner and liquidate within a period that suits you rather than being forced.
Here are some of the benefits of entering a Creditors Voluntary Liquidation:
- The company debts are written off completely
- The cost is more negligible compared to other forms of Liquidation
- You can stop any legal proceedings against you
- Your company will not need to go to court
How much does it cost to go into Creditors Voluntary Liquidation?
Many company directors delay voluntary Liquidation as they often assume that it will be a costly process. However, depending on the case’s complexity, generally, if the company has assets, the CVL costs and administrative fees can be paid for by the assets of the company.
Sometimes the assets can fall short of the cost of Liquidation. If this is the case, the directors would need to pay for the Liquidation out of their pockets.
This varies case-by-case basis; however, costs are approximately £5,000 to go into Creditors’ Voluntary Liquidation for a small business.
How long is the Creditors Voluntary Liquidation process?
A CVL is usually a fast process. 14 days’ notice should be given for a shareholders’ meeting. However, it could be less if 95% of shareholders agree with the Liquidation or not.
A day after the shareholder’s meeting, the company’s directors must give their creditors seven days’ notice.
The decision process should be between 3 – 14 days after the shareholders’ meeting.
Again, this varies depending on the company’s size and the case’s complexity.
What is the difference between Creditors Voluntary Liquidation and Compulsory Liquidation?
CVL (Creditors Voluntary Liquidation) should not be confused with compulsory Liquidation.
Compulsory Liquidation is where one or more creditors order a winding-up petition to the company, which the company ignores and then forces the company into Liquidation.
This differs from CVL as it is the directors who initially decide on entering a CVL and the shareholders who have the final vote.
When should I go into Creditors’ Voluntary Liquidation?
As CVL is a decision based on the board of directors, they must understand when the right time is to liquidate their company.
A company can perform various analyses to check whether this option is viable. Also, by conducting these tests, it could provide documentation that could prove to be beneficial in the future if the company goes down the CVL route:
- Check the balance sheet
The directors should check whether their liabilities are more than their assets. If their liabilities exceed their assets, the directors should look at liquidation options.
- Check the liabilities
Before going down the liquidity route, a company should check if they should still pay their liabilities when they are due and whether this puts them in a better position.
- Check creditor demands
If your company is under a lot of pressure from creditors for not paying debts on time, then this is possibly a time for you to become insolvent.
Directors can include solicitors’ letters which show suppliers demanding payment, bounced cheques, CCJs and statutory demands to provide evidence that they are struggling to pay their liabilities on time.
If you find yourself in this situation, get help as soon as possible before the situation deteriorates further.
How does a Creditors’ Voluntary Liquidation work?
Step 1 – Hold a Board of Directors Meeting
The company directors will hold a board of directors meeting to decide whether a CVL is the right strategy.
They will cast a vote, and if the majority agrees that the company should enter voluntary liquidation, the company will cease trading.
This process can happen rapidly if it is a small company with several directors.
Ceasing trading will mean that they will avoid having to incur further debt or put themselves at risk of wrongful trading.
If you are unsure whether you need to go ahead with your business becoming insolvent, speak to an insolvency expert who could assess your company’s circumstances and help you understand your next steps.
Step 2 – Instruct a Licenced Insolvency Practitioner
The directors will instruct a licenced insolvency practitioner who will manage the Liquidation and start getting the company liquidated.
Step 3 – Consent to Short Notice
A ‘Consent to Short Notice’ must be signed by 90% of the company’s shareholders. If the shareholders do not agree to the consent of short notice, they are given 14 days to approve, or a shareholders meeting is held.
Step 4 – Hold a Shareholder Meeting
The directors will agree to hold a shareholders’ meeting so that the shareholders can vote on placing the company into Liquidation.
At this point, they will also agree on the Licenced Insolvency Practitioner.
Step 5 – Hold a Creditors’ Meeting
The proposed liquidator or insolvency practitioner will inform the creditors that the company intends to liquidate.
Creditors will need to receive 7-14 days’ notice of the creditors’ meeting. This notice period is good practice; however, the creditors are entitled only to 3 business days regarding the CVL.
A formal meeting will occur if creditors have any concerns or questions about the CVL and agree on the licenced insolvency practitioner.
Step 6 – Companies House and The Gazette
Once the shareholders agree to wind up the company, the liquidator will notify Companies House and The Gazette of details of the insolvency.
Step 7 – Investigating the Financial Affairs
As well as notifying the various institutions regarding the company’s liquidation, the liquidator will also need to investigate the company’s finances.
Before this, the directors provide all the financial information when the CVL was first initiated; however, the licenced insolvency practitioner will need to do their due diligence.
They will scrutinise the company’s accounts and records to ensure that the directors have acted accordingly and offered the best possible outcome for the creditors.
However, if there are discrepancies, the insolvency practitioner has the right to file a report on the company’s directors to the Insolvency Service. This could mean possible disqualification for the directors.
Step 8 – The Finalisation Period
Once all the assets have been confirmed, they are then distributed to the creditors. Some creditors prioritise others, which is outlined more in the Insolvency Act 1986.
The liquidator will also advertise for claims for a final cut off so that any creditors wishing to make a claim can do so.
The insolvency practitioner will take formal steps to finalise the receipts and payments.
Step 9 – Completion of the CVL
When the CVL is completed, the company will be taken off the Companies House register. Any debts or liabilities that have not been paid will be written off.
The only time they might not be written off is if the debts were personally guaranteed. Then, the creditors could chase the guarantor to recover the debts.
How does a Creditors’ Voluntary Liquidation (CVL) affect a director?
A CVL gives a director some breathing space as they won’t be pursued by the creditors demanding money.
The best route for a director when they enter a CVL is to stop trading. If the insolvency practitioner sees any misconduct in the directors, there could be severe consequences.
Will my personal credit rating is affected by being a director after a Creditors’ Voluntary Liquidation takes place?
The debts of a company and a director should be separate, which means that your credit rating will not be affected if your company enters a CVL.
However, for debt liabilities with a personal guarantee attached, the director will be held responsible for the debt.
If the director does not pay the debts, then this will mean your credit rating will be affected.
Can I be a director again after a Creditors Voluntary Liquidation has occurred?
Yes, you can set up a new company under a new name. However, it does get complex if you want to reuse the company name when setting up a new company.