Creditors’ Voluntary Liquidation (CVL) is a formal insolvency process, under the Insolvency Act 1986, that allows a company’s directors to initiate the winding-up of an insolvent company’s affairs. This process is conducted under the supervision of a licensed insolvency practitioner (IP) and aims to ensure that the company’s assets are sold to repay its creditors. The term “voluntary” is used because the directors have volunteered to put it into liquidation as opposed to being forced to in a “compulsory” liquidation.
Who Can Put A Company Into Voluntary Liquidation?
A CVL is initiated when the directors of a company determine that the business is insolvent, meaning that it is unable to pay its debts when they fall due or its liabilities exceed its assets. The directors then convene a meeting of the company’s shareholders, who pass a resolution to place the company into liquidation and appoint an IP to act as the liquidator.
Once the liquidator is appointed, they will take control of the company’s affairs and assets, and work to realise the value of the company’s assets through the sale of its property, stock, and other assets. The proceeds from the sale are then used to pay off the company’s creditors, with any remaining funds distributed among the company’s shareholders.
What Are The Implications for Directors and Employees?
Remember a CVL can help to protect the directors of the company from further legal action, as long as they have acted in good faith and taken appropriate steps to minimize the impact on creditors. However, if the directors are found to have acted recklessly or fraudulently, they may still be held liable for any losses suffered by creditors. It is therefore risky to delay taking action as the situation is likely to get worse for creditors over time. As directors you have to act in the best interest of creditors once the company is insolvent. If you are not sure if your company is insolvent then look at these tests for insolvency.
A CVL can have implications for employees of the company, as their contracts of employment will be terminated when the company enters liquidation. In some cases, employees may be entitled to claim redundancy pay from the government’s National Insurance Fund.
When is it necessary for the directors of the company to think about creditors voluntary liquidation?
- Creditors are threatening a winding up petition or other legal action
- The company appears to not be viable
- The company cannot pay its debts on time
- The directors are concerned that the business has built up too much debt.
- The directors are worried about wrongful trading.
The Liquidation Procedure
- Board Meeting: The directors convene a board meeting to assess the company’s financial position and determine if it is insolvent. If they agree that CVL is the appropriate course of action, they will pass a resolution to initiate the process.
- Appointing an Insolvency Practitioner: The directors must appoint a licensed insolvency practitioner (IP) to act as the liquidator. The IP’s primary responsibility is to oversee the liquidation, realize the company’s assets, and distribute the proceeds to the creditors.
- Shareholders Meeting: Usually just before the creditors’ meeting where the shareholders agree to place the company into liquidation
- Creditors’ Meeting: The IP will convene a creditors’ meeting, typically within 14 days of the board meeting, to inform the creditors about the company’s financial position, the proposed CVL process, and to seek their approval. At this stage the creditors get to see what is termed an estimated Statement of Affairs (SofA). This document sets out what the position of the company is, what it owes it creditors and whether there is likely to be any dividend paid out.
Using the deemed consent process there is no need for an actual creditors meeting. Notices go out about the proposed liquidators and if no objections are raised within 14 days, then the liquidation process starts.
- Liquidation Commences: If the creditors approve the CVL, the liquidator will commence the process of realizing the company’s assets, settling any legal disputes, and distributing the proceeds to the creditors.
- Finalization: Once all assets have been realized and the proceeds distributed, the liquidator will prepare a final report and hold a final creditors’ meeting. After this, the company will be dissolved, and its name removed from the register at Companies House.
The process stops creditor pressure and associated worries. It ends those sleepless nights and ultimately helps you get on with your life.
So, if you would like to liquidate your company, call us on 0800 9700539. We can talk you through the process, organise the legal paperwork and begin proceedings.
DOWNLOAD HERE OUR COMPLETE GUIDE TO CREDITORS VOLUNTARY LIQUIDATION
How Much Does Creditors’ Voluntary Liquidation Cost?
The costs of the liquidation very much depends on the complexities of the case and the likely time it will take the Insolvency Practitioner to carry out their duties and responsibilities. The main things to consider are;
- The number of creditors and how much is owed.
- How many employees there are
- Are there any book debts to collect
- How much investigation is needed into the company’s affairs.
The costs of liquidation can put directors off but not doing anything is likely to cost you more in the long run! Generally our minimum fee is £4000 + VAT. This would be for liquidating a company with a single creditor, such as having an unpaid Bounce Back Loan (BBL) or HMRC. For more complex issues including companies who have landlords, employees, BBLs and supplier debts we will provide a written quote after our meeting with the directors to discuss the company’s options.
What if there are no assets to pay for the voluntary liquidation?
This is a common question. If there are no assets or monies in the company then the director(s) will have to pay the fee personally. It is reasonable to assume that much of the money for the fee will have been drawn out by the directors as either salary or dividend. As such, indirectly the company is paying!
It is possible that directors can claim redundancy, like any other employee, from the Redundancy Payments Office (RPO). However, be warned, this is by no means guaranteed and there is extra scrutiny of directors by the RPO. If you owe the company money then this will be offset what you are entitled to.
How Long Does the Process Take?
The appointment of a liquidator, which means that the powers of the directors cease, usually takes between one and two weeks.
It is possible, if 90% of the shareholders agree, to do a Creditors Voluntary Liquidation in seven days but this is rare. This is more likely to happen in the case of perishable assets such as fresh food.
However, the liquidators have to sell the assets etc, do investigations and file the necessary paperwork. This can take 1-2 years, if not longer. The bigger the liquidation, the longer it takes (usually).
Is It Possible To Reverse A Creditors Voluntary Liquidation?
If for some reason funds are found to pay back the creditors in full then it is possible to stop the process. However, this is extremely unlikely to happen. If there is money suddenly available at the eleventh hour then it might make more sense to allow the company to go into liquidation and buy back the assets at a fair value.
What happens after the liquidation is completed?
When all the assets are sold, creditors reported to, and any monies paid over from the liquidation the company is struck off the register and effectively ceases to exist. As the debts belong to the company the liability dies with the company. However, if directors have personally guaranteed the company liabilities then creditors will be able to claim on these. The liquidator will have investigated the conduct of the directors and assuming that there was nothing untoward then life carries on! Directors are able to start a new company although there are strict rules about reusing the same or similar company name. Learn more about this in our downloadable guide
One of the advantages of a CVL is that it allows for an orderly wind-down of the company’s affairs, which can help to maximize the value of its assets and ensure a fair distribution of funds to creditors. It can also help to avoid the need for a compulsory liquidation, which can be more expensive and time-consuming.
Can I Start A New Company After Liquidation?
You can be a director of a new company after you have liquidated the old one. However, there are some rules governed by the Insolvency Act 1986 Section 216 that puts resrictions on the reuse of company and trading names. Be careful about reusing names and read our advice on this here
Recent Insolvency Statistics as they relate to Creditors Voluntary Liquidations
In the second quarter 2023 Q2
- Creditors voluntary liquidations totalled 5,240 (a 9% increase from Q1 2023 and a 7% increase from Q2 2022). CVLs accounted for 83% of cases.