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Creditors
Voluntary Liquidation - FAQs
These questions and answers will give more detailed background to the
Creditors Voluntary Liquidation (CVL) technique. If you have any further
general or specific questions email us by clicking the link at the foot of
this page.
Q: If we propose a CVL what will the bank’s reaction be?
A: Naturally the bank will be disappointed. It is likely that the bank will
have some form of security - typically through a debenture. If the bank’s
lending to the company is significant and the company is insolvent they will
probably have taken steps to learn more about the company’s insolvent
position and how its security looks. If the bank debt is not material, they
will often wait until the liquidator recovers the assets and receive payment
in order of priority.
Q: We have not paid the PAYE for months, if we propose a liquidation
(CVL) what will the Inland Revenue do?
A: The debt which you have built up is important because the IR is an
"involuntary" creditor - in other words it cannot stop you building up debt
(unless it takes legal action to wind the company up -see COMPULSORY
LIQUIDATION) and because the funds you have failed to pay over are your
employees tax and NIC deductions. This is an illegal non payment and can
result in the veil of incorporation being lifted (directors protection under
limited liability) and the directors being made personally liable for the
debt. Many directors are completely unaware of this. Failure to correctly
operate a PAYE scheme is also a criminal offence. The IR may ask the
liquidator about the actions of the directors prior to the liquidation - did
they know they were trading insolvently? Did they take reasonable steps to
protect the other creditors? These questions can be complex and you should
take legal advice if you are concerned.
Q: We have not paid the VAT for 3 quarters now, if we propose a CVL what
will the VAT office do?
A: See above.
Q: What will my creditors think?
A: Most creditors will have to adopt a pragmatic approach., In a CVL it is
VERY unlikely that they will get one penny of their debts back. They may
however be angry and want to know why the company failed. They can attend
the creditors meeting, become part of the creditor’s committee and generally
keep in contact with the liquidator. However (unless the actions of the
directors can be shown to be negligent or fraudulent) they cannot take any
further action. Of course they are going to be reticent to provide credit in
future.
Q: What happens in a CVL in detail?
A: See the guide at Creditors
Voluntary Liquidation
Q: Can’t we just close the company and keep the business?
A: No. If the company has more debts than assets or is insolvent on the
balance sheet test you must liquidate the company (it is also possible to
dissolve the company under 252 Companies Act provided there has been no
trading for 3 months and the company is dormant or defunct). Email us if
this seems possible.
Q: Can we use the same name again?
A: There are certain restrictions on re-use of trade names. It is possible,
provided the liquidator or the court agrees, but the rules are tight and are
aimed at "passing off". For detailed answers to this question take
professional advice or email us.
Q: Will I be personally liable for the company’s debts?
A: The veil of incorporation theoretically protects the directors from being
liable in the event of an insolvent liquidation. But, remember the
liquidator must investigate the conduct of the officers of the company in
the period up to the closure of the company. If he can prove that there were
actions by the directors that contravene the insolvency or companies
legislations then he must file a report with the DTI. Likewise he may take
action on behalf of the creditors to recover assets of the company. It is
possible that the DTI can start proceedings to strike off the officer if a
case can be made. Finally the Crown creditors may take legal action to
recover monies if certain conditions apply. If in doubt take advice from an
insolvency practitioner (IP) or email us.
Q: Can I avoid personal guarantees to the bank?
A: Not normally. If the directors have given personal guarantees (PG’s) and
the assets of the business are insufficient to repay the bank then it is
possible that the bank will take action, to recover their money, against
you. If the assets are sufficient and the bank is repaid in full your PG’s
will be cleared - but always pursue the bank to have them nullified.
Q: I want to look after my employees what happens to them in a CVL?
A: There is safety net of measures to reduce the financial hardship of
employees in the event of liquidation (and where the business is not sold as
a going concern). They will receive redundancy from the Redundancy Fund.
They will also receive (capped to £290 per week) payments in lieu of notice,
holiday pay and arrears of pay. These payments are funded by Government who
levy a charge on all assets collected in liquidations to help pay for them.
The Government can reclaim from the company if it is subsequently found to
have adequate assets for example.
Q: Why not just pay them and then liquidate?
A: What appears to be a noble gesture by the employer can in fact be an
illegal step. Under the rules of preference such a payment may put the
employees in a better position than they would have been and, if it can be
proved that there was a desire to make them better off, this could be a
"preference". No, the best method is to use the safety net described above.
Q: We have big tax losses - will we lose them in a CVL?
A: Yes normally.
Q: What is wrongful trading then?
A: This is where the officers of the company failed to act correctly when
they knew that the company was insolvent, they failed to take the actions of
a "reasonable person" to maximise the body of creditors position and they
wilfully continued to take credit that they understood they might not be
able to repay. Failure to submit annual returns and accounts is also just
cause. If the liquidator can prove that these actions took place he can
start an action or seek advice. It can be grounds for the liquidator and the
DTI to start recovery or disqualification actions.
Q: What happens if a creditor already has a winding up petition
A: The company cannot nominate a liquidator when a creditor has a winding up
petition with a hearing granted.
Q: I have heard that I just need to sell the assets to a third party
cheap and then liquidate, afterwards I can buy them back and start trading
again?
A: This is usually just "bar-room lawyer talk". Whilst it may be possible it
is certainly not legal!
Q: How do we pay the cost of a CVL if we have no cash or assets?
A: A common problem that faces directors where the assets have all been used
to borrow against.
Essentially there are the following options:
1) - Cease trading and wait three months, apply to the Companies Registrar
to dissolve the company (almost impossible if lots of creditors chasing for
payment) under the Companies Act.
2) - The directors can pay for the cost.
3) - Cease trading and wait for a creditor to wind the company
up compulsorily.
One would comment that if the directors have got the company into this
position it is possible that they have traded wrongfully - an area that
demands professional advice.
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