Creditors' Voluntary Liquidation

What is the process of a Creditor’s Voluntary Liquidation (CVL)?

A Creditors’ Voluntary Liquidation, abbreviated as CVL, is a formal insolvency procedure that concludes the affairs of an insolvent company. This process can only be initiated under the supervision of a licensed insolvency practitioner, who takes on the role of liquidator for the company throughout the procedure.

 

How to know if your company is insolvent

Two key tests determine if a company is insolvent: 

1. The cash flow test

2.the balance sheet test

 

Cash flow insolvency arises when a company can’t meet its obligations as they arise, while balance sheet insolvency occurs when a company’s liabilities surpass its assets. If you suspect your company is insolvent or will become so, steps should be taken to mitigate the impact on your creditors.

When a company is insolvent, refrain from seeking further credit and be cautious about paying creditors if you lack sufficient funds to settle all debts. Prioritising one creditor over another may lead to personal liability for repayment if the company undergoes liquidation. Moreover, safeguard business assets and funds, refraining from selling or transferring them out of the company.

Trading while knowingly insolvent is highly risky and could result in personal liability for creditor losses incurred. If you suspect insolvency, seek advice from a licensed Insolvency Practitioner. They’ll outline the company’s options and ensure compliance with directorial duties, reducing the risk of wrongful trading or misfeasance.

 

Creditors’ Voluntary Liquidation Defined

A Creditors’ Voluntary Liquidation (CVL) is a formal insolvency procedure where the directors of an insolvent company opt to close the business voluntarily.

While this decision is voluntary, it typically comes after months of financial strain when hopes of a successful turnaround have faded. Despite being less than ideal, when an insolvent company lacks a viable future as a profitable entity, opting for liquidation via a Creditors’ Voluntary Liquidation may be the most suitable solution for all involved.

 

Creditors’ Voluntary Liquidation: How It Works

While various formal insolvency procedures like administration and CVAs aim to turn around struggling companies, some businesses are beyond saving, and the best course is liquidation. This allows directors to move on, and creditors to recover as much money as possible from realisable assets.

A CVL concludes the company’s affairs and addresses all outstanding debts. Though asset realisations aim to maximise returns to creditors, there’s usually a significant shortfall in CVL cases, which gets written off upon liquidation. However, debts personally guaranteed by directors won’t be written off; directors remain responsible for paying them.

It’s important not to confuse CVL with Members’ Voluntary Liquidation (MVL), a solvent company’s liquidation option when directors aim to extract funds efficiently before closing the company.

 

Initiating a Creditors’ Voluntary Liquidation Process for Your Company

A CVL must be initiated under the guidance of a licensed Insolvency Practitioner. These professionals offer sound, practical advice when dealing with distressed companies, and it’s strongly advised to consult one at the first signs of insolvency. They can explore various options for the company, including rescue and restructuring procedures like Administration or a CVA.

However, if the business is beyond saving or if directors and shareholders prefer to close the company permanently, a Creditors’ Voluntary Liquidation is likely the best course of action.

 

The Process and Timeline of Creditors’ Voluntary Liquidation (CVL)

i. Board Meeting or Sole Director Decision

After consulting with a licensed Insolvency Practitioner and deciding to initiate the voluntary liquidation process, the directors or a sole director hold a meeting of the board. In the case of a sole director, they document the decision. This resolution sets a Decision Date for convening a general meeting of shareholders and obtaining creditors’ decision to place the company into liquidation.

At this stage, the directors officially engage a licensed Insolvency Practitioner to oversee the liquidation process and prepare the necessary documentation to commence proceedings.

ii. Issuing Notices to Shareholders and Creditors

After the director(s) decide to initiate voluntary liquidation, shareholders and creditors are informed of the general meeting and Decision Date.

Before the Decision Date, creditors receive a Statement of Affairs outlining the company’s financial status. This document lists assets and liabilities, estimates realisable asset values, and calculates the expected shortfall to creditors.

Additionally, the Insolvency Practitioner prepares a report including the company’s trading history, excerpts from recent accounts, and a deficiency account detailing financial transactions from the last accounts to the liquidation date. These documents must be provided to creditors no later than the day before the Decision Date.

iii. Beginning the Voluntary Liquidation of the Company

The general meeting of shareholders and the Decision Date of Creditors typically occur on the same day. For the company to enter liquidation, at least 75% of shareholders must agree to wind it up.

Liquidation begins at 23:59 on the Decision Date, and the appointment of the liquidators is considered approved. This process can be conducted remotely with the director(s), alleviating some stress from the procedure.

iv. The Liquidation

Throughout the company’s liquidation, the Insolvency Practitioner will maintain communication with creditors, address any issues regarding creditor claims, and take necessary steps to realise company assets for distribution among outstanding creditors.

All assets undergo independent valuation, marketing, and sale as appropriate. Directors of the insolvent company may purchase company assets, provided the transaction is negotiated through the Insolvency Practitioner and assets are bought at market value.

The Insolvency Practitioner is also responsible for collecting outstanding book debts, handling employee claims, submitting required reports to government agencies, and distributing available funds to creditors. The Insolvency Act 1986 establishes a priority order for allocating funds to creditors. Secured creditors with a fixed charge receive first payment, followed by preferential creditors (including staff owed wage arrears), and then secured creditors with a floating charge (subject to deductions for the Prescribed Part).

Unsecured creditors, such as suppliers, customers, and HMRC, follow in the order of priority. However, at this stage, there’s typically insufficient funds remaining for significant returns to be made.

 

Post-Creditors’ Voluntary Liquidation: What Comes Next?

Upon completion of the liquidation, the company will be removed from the register held at Companies House, ceasing to exist. Unpaid liabilities of the company will be written off, unless personally guaranteed.

As part of the process, the liquidator must scrutinise actions taken by directors (including former directors within the last 3 years). If they’re found to have breached their fiduciary duties while knowingly insolvent or conducted transactions detrimental to creditors and subject to challenge, they may face charges of wrongful trading, fraudulent trading, or misfeasance.

This could lead to directors being personally liable for some or all of the company’s debts and potential disqualification from acting as a director of any company for up to 15 years. However, such occurrences are extremely rare, and in the majority of cases, directors are free to move on and even establish another business if they choose to do so.

 

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How can Vanguard Insolvency help?  

Contact us today to schedule a complimentary consultation and discover how we can assist you and your company in overcoming distress. Whether your goal is to rescue the business or explore voluntary winding-up options, we’re here to help. With over 100 offices nationwide, Vanguard Insolvency provides unparalleled director advice regardless of your location in the UK. 

David Jackson MD
Senior Partner at Vanguard Insolvency Practitioners | Website

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.