Creditors Voluntary Liquidation CVL – Frequently Asked Questions

In the course of business, not every venture follows the path to success. Sometimes, companies find themselves in financial trouble, unable to pay their debts, which can lead to insolvency. For UK-based limited companies in such a challenging position, one available formal insolvency procedure is Creditors Voluntary Liquidation (CVL).

In essence, a CVL is a legal process that a financially distressed or insolvent company voluntarily initiates to wind up its affairs, allowing the company assets to be sold in order to repay as many of the company’s debts as possible. Unlike compulsory liquidation, which is enforced by the court, a CVL offers the directors some control over the liquidation process, although they must appoint an authorised IP to manage the procedure.

Initiating a CVL is a significant decision with far-reaching implications for all involved parties – the company director, its shareholders, and its creditors. This decision can, however, also provide a structured way out of insurmountable debt, offering the possibility of a fresh start.

This article will provide a comprehensive guide to Creditors Voluntary Liquidation (CVL), discussing its process, advantages, disadvantages, and other pertinent aspects. It’s important to remember that entering into a CVL should not be taken lightly, and it’s always recommended to seek advice from a fully licensed insolvency practitioner (IP) or a legal professional before embarking on this path.

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What is Creditors Voluntary Liquidation (CVL)?

Creditors Voluntary Liquidation (CVL) is a formal insolvency procedure in the United Kingdom. It’s an option for limited companies that are insolvent, meaning they can no longer meet their financial obligations, pay their company debts, or when the company’s liabilities exceed its assets. Essentially, a CVL is initiated when a company is not in a viable financial position to continue trading.

In a CVL process, the company director voluntarily decide to “wind up” the company. It involves liquidating the company assets to repay creditors and then dissolving the company. An insolvency practitioner, who is a specialist licensed to carry out insolvencies, is appointed to manage this process.

Key Participants in the CVL Process:

1. Company Directors: The company directors initiate the CVL procedure. They are the ones who recognise the insolvent state of the company and decide to cease trading in order to prevent further debts. After initiating the CVL, they must cooperate fully with the appointed insolvency practitioner during the process.

2. Insolvency Practitioner: A licensed insolvency practitioner (IP) is appointed to administer the CVL process. They value and sell the assets, distribute the proceeds to the creditors, and handle all communication between the company and its creditors.

3. Creditors: Creditors are individuals or entities to whom the company owes money. They play a critical role in the CVL process. They can be preferential creditors, who are first in line for payment (like employees owed wages), secured creditors, who hold security against money owed, or unsecured creditors like suppliers and HMRC.

4. Shareholders: The company’s shareholders (or members) hold a meeting to pass the resolution for CVL after the directors have proposed it. A majority of 75% is needed for the resolution to pass.

The CVL process aims to sell the company assets fairly and equitably to repay as many outstanding creditors as possible. However, it’s crucial to note that not all creditors may be fully repaid if the assets don’t cover all its debts. Following the liquidation, the company ceases to exist. This is why it’s a significant decision, which should only be made after careful consideration and professional advice.

The Creditors Voluntary Liquidation Process: A Step-by-Step Guide

Understanding the CVL process can provide insights into the implications of liquidation. The procedure can be summarised into several key stages:

Step 1: Identifying Insolvency

The first step of the process involves recognising the company’s position. Company directors must acknowledge that the company is insolvent. It is a state where the company cannot pay its debts as and when they fall due, or when the company’s liabilities exceed its assets. This may also be a time when directors take advice from a fully licensed IP or seek advice on potential PGs or risks of wrongful or fraudulent trading.

Step 2: Consultation with an Insolvency Practitioner

If the directors conclude that the company’s financial situation is untenable, the next step is to consult with a licensed insolvency practitioner. They will provide advice on the best possible route forward, considering the interests of the company’s creditors, shareholders, and the directors themselves.

Step 3: Shareholders’ Meeting

If the directors decide to proceed with a CVL, they will convene a shareholders meeting. The purpose of the shareholders meeting is to pass a ‘winding-up resolution’. This decision requires a 75% majority vote from the shareholders.

Step 4: Creditors’ Meeting

A meeting of the creditors is usually held on the same day as the shareholders’ meeting, but it can be held up to 14 days after. Notice of the creditors’ meeting must be given in advance, and it can be conducted as a virtual or physical meeting. The meeting provides an opportunity for creditors to ask questions about the company’s affairs and to formally appoint the insolvency practitioner.

Step 5: Liquidation Process Begins

Once the insolvency practitioner has been appointed liquidator, they take control of the company and its assets. They are responsible for selling off company assets and distributing the proceeds to the creditors. They also handle any redundancy to employees and ensure that all legal and administrative requirements are met.

Step 6: Distribution of Assets

Assets are distributed in a specific order set out in the Insolvency Act. Preferential creditors are paid first, followed by secured creditors and then unsecured creditors. If any funds are left over after these debts have been paid, they are distributed to shareholders.

Step 7: Dissolution

After the assets have been distributed and all matters settled, the company is formally dissolved. The authorised insolvency practitioner will send a final report to Companies House, and the company is then struck off the register.

Please note, this is a general guide to the process, and it may vary depending on the specific circumstances of each company. Each stage of the process should be discussed with a licensed insolvency practitioner to ensure the correct steps are taken.

The Cost of a CVL

The cost of a Creditors Voluntary Liquidation can vary greatly depending on the complexity of the company’s affairs, the number of creditors, the amount of debt, and the appointed insolvency practitioner’s fees. Costs typically include the insolvency practitioner’s fee, legal costs, and administrative expenses. Directors must be aware of these costs when considering a CVL, as they will reduce the funds available for distribution to creditors.

Advantages of a CVL

A CVL can have several advantages for a distressed company, its directors, and its creditors:

1. Controlled exit: A CVL offers a controlled exit strategy for a struggling company, allowing directors to manage the process rather than being forced into compulsory liquidation by their creditors.
2. Reduced personal liability: Directors can minimise the risk of being held personally liable for wrongful trading, especially if they have acted responsibly and taken advice from a licensed insolvency practitioner at an early stage.
3. Possibility of director redundancy pay: Directors may be eligible for redundancy, which could be a significant sum depending on their length of service.
4. Creditor relations: The transparent process can help maintain better relations with creditors, as they will be involved in the process and have a say in appointing the insolvency practitioner.

Disadvantages of a CVL

Despite the benefits, there are also disadvantages that directors should consider:

1. Company closure: Once the CVL process starts, it ultimately leads to the closure of the company.
2. Potential investigation: Directors’ conduct will be investigated by the appointed insolvency practitioner and could lead to disqualification if misconduct is found.
3. Personal guarantees: If directors have provided PGs to creditors, they may still be required to pay these debts personally.
4. Impact on credit rating: A CVL will likely impact the director’s personal credit rating if they have given PGs.

In conclusion, a CVL is a serious step with considerable implications for the company’s directors, shareholders, and creditors. It is a decision that should not be taken lightly and should only be made after taking advice from a licensed insolvency practitioner.

Cost of Creditors Voluntary Liquidation (CVL)

The cost of a CVL can vary significantly depending on the size of the company, the complexity of the case, and the appointed insolvency practitioner’s fees. In most cases, these costs are met from the realisation of the company’s assets. However, if the assets are insufficient, the directors might need to contribute personally.

1. Professional Fees

The bulk of the costs in a CVL process are the insolvency practitioner’s professional fees. These fees depend on the amount of work required and can range from a few thousand pounds to significantly higher amounts in complex cases.

2. Disbursements

These are costs incurred by the insolvency practitioner during the liquidation process, such as advertising the creditors’ meeting, statutory fees, insurance costs, or costs associated with the realisation of assets.

3. Legal Costs

If there are any legal disputes, such as recovery of debts, the associated legal costs will add to the overall cost of the CVL.

4. Costs of Realising Assets

These costs can include professional valuations, auctioneer’s fees, and any other costs associated with selling the company’s assets.

In conclusion, while the cost of CVL can seem substantial, it’s essential to weigh it against the potential cost of not taking action in an insolvent situation. The penalties for wrongful trading, and the potential for personal guarantees to be called in, could result in significantly higher costs for the directors personally. As such, obtaining advice from a licensed IP is critical when considering a CVL.

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Frequently Asked Questions about Creditors Voluntary Liquidation (CVL)

Navigating the ins and outs of CVL can be challenging, particularly for directors of struggling companies. In this section, we address some of the most common queries related to the topic.

1. What happens to the company’s assets in a CVL?

During a CVL, the company’s assets are sold off to repay the creditors as much as possible. The appointed insolvency practitioner is in charge of this process, aiming to get the best possible price for each asset.

2. Can directors be held personally liable for company debts?

Typically, directors are not held personally liable for the debts of a limited company. However, if they have provided personal guarantees for loans, they could be held liable. Additionally, wrongful trading or misfeasance can also lead to personal liability.

3. Who is a preferential creditor and how are they different from unsecured creditors?

Preferential creditors include employees owed wages, redundancy pay, and certain taxes due to HMRC. These creditors are paid before unsecured creditors in the liquidation process. Unsecured creditors, such as trade creditors and those with non-guaranteed loans, are paid last and often only receive a fraction of what they are owed.

4. What happens at a creditors’ meeting?

A creditors’ meeting is held to allow the creditors to approve the appointment of the IP, ask questions about the company’s financial position, and agree on the terms of the liquidation. This meeting can be held physically or virtually.

5. What is the difference between a CVL and a compulsory liquidation?

A CVL is a voluntary process initiated by the company’s directors when they realise the company is insolvent. A compulsory liquidation, on the other hand, is usually initiated by a creditor filing a winding-up petition at the court because they haven’t been paid.

6. Can a company continue trading during a CVL?

No, the company must cease trading when a CVL is initiated. Continuing to trade could result in accusations of wrongful trading.

Remember, this guide is a starting point. It’s always wise to seek advice from a licensed IP if you think your company may need to enter a CVL.

Taking the Next Step

If your company is facing financial difficulty and you’re considering Creditors’ Voluntary Liquidation, we understand that you may have a plethora of questions and concerns. Here at Company Doctor, our experienced team is ready to provide expert, personalised advice for your unique situation.

Don’t navigate this journey alone. We can guide you through the complexities of liquidation, helping you to better understand your options and what they mean for your company’s future. Whether you have a specific query about the CVL process or you’d simply like to explore your choices, our licensed insolvency practitioners are on hand to provide the assistance you need.

Get in touch with us today at 0800 169 1536. We’re ready to help turn your business around and give you the confidence to take the next step. Remember, seeking early advice is crucial and can make a significant difference in the outcome. Let Company Doctor be your trusted guide during this challenging time.

References

The primary sources for this article are listed below.

A guide to creditors’ voluntary liquidation (CVL) | The Gazette

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