A Creditors Voluntary Liquidation (CVL) is a process where the directors decide that the company is insolvent and they voluntarily decide to liquidate it. This is instead of allowing the creditors to wind it up compulsorily through the courts.
What is the process of a CVL?
A liquidator who is appointed by the creditors ‘winds up’ the company’s affairs. It sells all of the insolvent businesses’ assets and the proceeds go to as many creditors as possible. The proceeds are distributed in order of priority.
By the end of the liquidation process, the company is completely dissolved and struck off the Companies House register. As such, the company ceases to exist. The Insolvency Service will also investigate the conduct of the company’s directors. They will be looking for signs of wrongful or fraudulent trading.
A CVL is typically performed as follows:
- Following consultation with an insolvency practitioner, the directors will convene an extraordinary general meeting with 14 days’ notice, at which shareholders will vote to wind up the company and, in most cases, appoint a named liquidator.
- To wind up the company, 75 percent of the shareholders present and voting must vote in favour of the resolution. This is usually made up of the directors.
- During the time between calling a shareholders meeting and holding that meeting, the proposed liquidator will notify the company’s creditors of its intention to enter voluntary liquidation and provide them with information about the company’s financial position ahead of the creditors’ decision process. Creditors, on the other hand, are only entitled to three business days’ notice of the proposed CVL. It is unusual to have a formal physical meeting these days. When creditors do not object to a director’s choice of liquidator, the liquidator is appointed by ‘deemed consent’. If creditors have questions or concerns about the process or the appointment of the liquidator, a virtual meeting of creditors may be held.
- Once the shareholders have approved the resolution to wind up the company, the liquidator must file a copy with Companies House and publish it in The Gazette.
- The liquidator must also conduct an investigation into the company’s financial affairs. The information they have will have been provided by the directors up to that point, but once in office, the liquidator has the authority to request all of the company’s books and records and to investigate the company’s affairs in order to achieve the best result for creditors. The liquidator must also report to the Insolvency Service on the conduct of the directors so that disqualification can be considered.
- Once all assets have been realised and distributions to creditors have been made (the Insolvency Act 1986 establishes a set order of priority, and the liquidator will advertise for claims for a final cut off), the liquidator will take the formal steps to agree on the final receipts and payments.
- The company will be removed from the Companies House register once the CVL is completed. Any liabilities that remain unpaid by the company will be written off, unless personally guaranteed, in which case the creditor who benefits from the guarantee may pursue the guarantor.
How can a CVL ease our worry, stress and stop the creditors calls?
Well, the process of a company debts getting out of control is not a happy one for the directors and or creditors. Directors cannot or will not give information on payments, so the creditors keep chasing because their systems say they have to.
This can lead to legal actions, bailiffs, petitions and legal threats.
Eventually the stress of this can cause you to be depressed and possibly even suffer illness. The best way to deal with a company that is simply not viable is to commence liquidation quickly. Call now to start relieving the pressure!
If we start the CVL process what will the banks 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 banks 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 already.
If the bank debt is not material, they will often wait until the liquidator recovers the assets and receive payment in order of priority. In liquidation the bank must give the liquidator permission to collect his fees. In the event of bounce back loans not being paid back there is not a personal guarantee attached but any liquidator will look at where the money has gone. See later about liability for loans.
We have not paid the PAYE for months, if we propose a CVL what will HMRC do?
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. HMRC 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.
Really, though if the debt is modest and the directors have tried their best, there will be little reaction to a CVL from HMRC. As of 2020 HMRC are now preferential creditors so they will get their money ahead of other trade creditors.
A quality KSA Group tip: make sure you file ALL PAYE and tax returns, P11Ds, VAT100 returns and so on. HMRC takes a dim view of not filing these even if you cannot pay the tax.
What will my creditors think?
Most creditors will have to adopt a pragmatic approach. In a CVL it is VERY unlikely that they will get more than a few percent 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 creditors committee and generally keep in contact with the liquidator. However (unless the actions of the directors can be shown to be wrongful, negligent or fraudulent) they cannot take any further action.
Of course, they are going to be reticent to provide credit in future, especially if you start again with a phoenix company.
Can’t we just close the company and keep the business?
A: Not really. If the company has more debts than assets or is insolvent on the balance sheet test you should really liquidate the company. Keeping the business is not an option as this could be seen as a transaction defrauding creditors, if it has a value it must be paid for. So yes, you could keep the business but its best to do it properly through the liquidation process.
It is also possible to dissolve the company under 252 Companies Act 1985 provided there has been no trading for 3 months and the company is dormant or defunct. And has no assets.
Email us if this seems possible.
Q: Can we use the same name again?
A: There are certain very strict 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.
S216 Insolvency Act sets out strict rules for this and you should always take great care to get professional advice. Did you know it is a criminal offence to pass off as the old company?
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 3 year 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 Department for Business and Trade (DBT) Likewise he may take action on behalf of the creditors to recover assets of the company.
It is possible that the DBT 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 from directors 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 easily. If the directors have given personal guarantees (PGs) and the assets of the business are insufficient to repay the bank in full 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 PGs will be cleared – but always pursue the bank to have them nullified.
Talk to us about the debt situation your company has and any PGs a sensible approach could allow the bank to recover much of their debt thus reducing your liability.
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 £544 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 the company?
A: What appears to be a noble gesture by the employer can in fact be an illegal step. Under the rules of preference (s239 Insolvency Act 1986) 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”.
If this is proven they may have to pay this back to the liquidator! So 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?
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 DBT to start recovery or disqualification actions.
See a guide to wrongful trading here for further information or take advice from KSA.
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. Of course a creditors voluntary liquidation may be cut down the costs and possible complexities of the liquidation. In this event, the petitioning creditor must consent to withdraw his petition, but remember he is not compelled to withdraw the petition.
Alternatively, if there is a petition then obtaining an administration order will create an effective moratorium over the winding-up petition. See a guide to Administration here.
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! If this is discovered then it can be reversed by the Court upon application by the liquidator. (S423 Insolvency Act 1986 sets out the way this works).
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 to cover the cost; They are the number of creditors, assets and geographic area.
Dissolution: 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. If there is any material tax debt HMRC will not usually allow dissolution.
The directors can pay for the cost out of their own funds. I know you have probably not had a lot of money out of the business but this is a very good way of ensuring the burial is done properly.
Cease trading and wait for a creditor to wind the company up compulsorily. This leads to more pressure on the directors.
If the company has modest assets that can be sold for say £1-4k, on eBay for example, then you could top up the rest? If you are a retailer sell off the stock before closing the doors. Keep the cash takings for the fees. Or you could use your credit card to spread the cost.
If the pressure is too much and you have the funds to pay then paying the fee yourself is the smartest way of stopping the creditors pursuing you. So, if you really want an end to reporting, compliance, creditors chasing you and the directors then CVL is the BEST OPTION.
Q: Why is that much?! How do we pay that?
A: Well for a start only licensed insolvency practitioners can perform the role of liquidator. He or she must be licensed by the DBT and regulated by a professional body. This costs money to qualify and relicense each year. Secondly, the liquidation process has very strict rules of advertising in the local press and London Gazette; this costs money. Thirdly, they must insure their actions and any company assets (this is called a bordereaux). Fourthly, they must call and pay for a creditors meeting. If there are lots of creditors they must all be written to and files set up to cope with incoming mail, votes and queries. Finally they do need to investigate the conduct of the directors to check there is no impropriety.
All of this takes time which they need to recover and be paid for.
Warning. There are a number of companies that say that directors can claim redundancy to pay for the liquidation. This is really only possible in very rare circumstances where you have taken most pay via PAYE and have an employment contract, and have only taken dividends during profitable times. Regulators are cracking down on firms that are magically finding employee contracts or claiming they exist. It really isn’t worth the risk.
“That’s great but I want to ask another, more detailed, question”!
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