Creditors Voluntary Liquidation
A Creditors Voluntary Liquidation (CVL) is a formal procedure used to close an insolvent company and is the most common type of liquidation in the UK. A company is classed as insolvent if it cannot pay its debts as they fall due. By entering a CVL the directors are making an admission that the company is insolvent.
If a CVL is deemed to be the best option for a company the director(s) can work alongside a licensed Insolvency Practitioner (the proposed Liquidator) to prepare for the CVL and secure the agreement of the shareholders. Once a decision has been made that a company needs to enter into a CVL it is usual that it will stop trading with immediate effect. By doing this it stops the situation escalating and makes sure that the creditors position is not made worse. This in turn can protect the director(s) with regards to claims of wrongful trading.
The assets of the company must be realised, once it has entered into liquidation, and the funds raised will be distributed out to the Creditors. It is possible that the assets can be sold to the director(s) of the existing company to enable them to create a new business going forward.
Although undesirable it is best to act as soon as possible to avoid any repercussions of claims of wrongful or fraudulent trading. Also, by acting promptly it can give the Director(s) more options going forward and can stop a creditor petitioning to Court for the company to be wound up. If this happens the director(s) lose complete control of the company and what happens to it (and its assets).
Advantages of a Creditors Voluntary Liquidation
- Director(s) maintain some level of control over the process and who acts as liquidator (an Insolvency Practitioner of their choosing)
- The Insolvency Practitioner (as liquidator) will deal with all creditors of the company
- If there is a viable business model the director(s) can set up a new company and potentially purchase the assets of the old company through the new company
- It draws a line under the old company and the debts of the company
- Does not stop the director(s) becoming director(s) of another company
Disadvantages of a Creditors Voluntary Liquidation
- If there has been wrongful trading the liquidator is duty bound to investigate the conduct of the director(s)
- If there are overdrawn directors loan accounts, they will need to be repaid
- All staff will be made redundant
As mentioned above if there is a viable business model the director(s) may decide that they wish to continue trading through a new company. This way the business can succeed without the historical debts of the old company dragging it down.
Upon entering a CVL the assets of the company will need to be realised (sold), however they do not need to be sold to a third party or someone unrelated to the original company. They can be sold to the director(s) of the original company. This must however, be done openly and they must be sold at the true market value.
There are also strict rules in relation to the name of the new ‘phoenix’ company in that it cannot be the same or so similar to the original company name that people could assume it was the same company.
A licensed Insolvency Practitioner can advise you further in relation to this.
Acting as a director of a financially distressed company will often create dilemmas and deciding whether to enter liquidation can be a very tough call to make. However, directors have a responsibility to admit when their company is insolvent and there are potentially very serious ramifications for anyone found guilty of continuing to operate a business they knew to be insolvent.
This often means that entering a Creditors Voluntary Liquidation is a prudent course of action for a company that is unable to pay its debts.
Even honest mistakes can potentially be interpreted as misconduct, when liquidation is entered on a compulsory basis (by a creditor petitioning for the company to be wound up) and the result can be directorial disqualifications, fines and potentially the prospect of directors becoming personally liable for company debts once their actions have been investigated.