Creditors Voluntary Liquidation

Creditors Voluntary Liquidation (CVL) is also known as ‘insolvent liquidation

What is Creditors’ Voluntary Liquidation?

Creditors’ Voluntary Liquidation (“CVL”) is also known as ‘insolvent liquidation’. It is a procedure which can be instigated by the director(s) of an insolvent company, where the shareholders’ of the company agree that the business should cease trading.  This is the form of liquidation, which is most commonly used in the UK.

When the directors’ have resolved that the company should enter into CVL, all trading must cease and company assets will be sold in order to repay its liabilities.  Secured creditors’ with a fixed charge will generally take priority, followed by creditors’ with a floating charge, and unsecured creditors.

When is a CVL a suitable option?

A CVL is likely to be the most suitable option if a company has debts it cannot afford to repay and there is no longer a viable business to be saved.  Many companies trading in the UK at present may find themselves in an insolvent position, or suffer from short term cash-flow difficulties.  This situation, in itself, does not mean that a CVL would be the most appropriate solution and careful consideration must be given to all of the relevant circumstances.

However it is always important to take prompt action if a company simply does not have the ability to continue trading, without worsening the position for its creditors’. 

What are the alternatives to CVL?

The suitable alternatives to CVL will depend on how much (if any) of the business can be rescued.  A Company Voluntary Arrangement would provide a company with sufficient protection to enable it to carry on trading.  However, it must be able to trade profitably on a cash positive basis, and make monthly contributions towards its existing indebtedness.

Another alternative would the sale of the business to a newly incorporated company.  A sale of this nature can be achieved following Administration or Creditors Voluntary Liquidation.  However, directors’ should be aware that setting up a new company with the same name, or a name so similar as to suggest an association with the failed company, is an offence.  There are certain procedures for directors’ to follow which will ensure that they do not fall foul of the insolvency legislation.

If the company is specifically struggling with debts due to HM Revenue and Customs then an informal option, such as negotiating a Time To Pay Arrangement. 

For further information on the different insolvency processes, see here.

What does the Liquidator do?

A Liquidator must be a licensed IP. The Liquidator will facilitate a formal wind down of the company, realise the company’s assets, and distribute the funds to the company’s creditors’, in order of statutory priority. The Liquidator will also prepare and file all of the necessary documentation at Companies House and ensure that the winding up is fully compliant with the current legislation.

The Benefits of a CVL

Out of Court Process

By resolving to liquidate a company on a voluntary basis, directors’ can avoid the processes involved with compulsory liquidation.  Assuming that the directors’ have taken action at an early stage, it is unlikely that a petition for winding-up will be presented against the company, and voluntary action will demonstrate that the liquidation arose by choice, rather than hostile creditor action.

No Further Legal Action  

The company may be facing legal action and action against its assets. When a company enters into CVL, no further action can be taken by creditors’ to recover sums due from the company, and the creditors’ will be dealt with on pro rata basis. If there is a petition to wind up the company, generally this will be dismissed allowing the company to be wound up voluntarily. 

The directors’ will usually have no personal liability for company debts, unless they have provided a personal guarantee.  If guarantees have been provided in relation to company debt it is important to assess the impact this could have on your personal circumstances, and obtain professional advice.
Payment of Redundancy Claims  

Unfortunately all members of staff must be made redundant, on or before the cessation of trade.  This is understandably a daunting task, but we will guide directors’ through the process and attend staff meetings with you.  

However, once all members of staff are made redundant they are able to make a claim for monies due under their contracts of employment.  Such claims can include amounts due for unpaid wages, unpaid pension contributions, pay in lieu of notice, holiday pay, and redundancy pay.  Claims may be subject to statutory limits and we will provide employees with information on how to make their claim. 

All claims are submitted to the Redundancy Payments Office (“RPO”), and paid out of the National Insurance Fund.  The Liquidator will work with the RPO to ensure that employee claims are paid as soon as possible. 

Termination of Lease / Hire Agreements 

In many cases, a company will have substantial commitments in relation to lease / hire agreements.  In general, the terms of these agreements are terminated when the company enters liquidation, and no further payments will be made.

If there are arrears of payments due to leasing companies, these will be claimed in the liquidation in the same manner as the ordinary unsecured creditors’.  Goods subject to hire will be returned to the leasing company, or it may be possible to negotiate a transfer of the remaining term to a new entity. 

Lower Costs

Professional fees and costs associated with the CVL process are usually met from the sale of company assets, and can be significantly lower than the costs associated with other insolvency processes.  If the company has no assets, or insufficient assets to meet the costs of liquidation then the directors’ may be required to meet upfront costs.

The costs of placing a company into CVL can be as little as £3000 + VAT but this is dependent on the complexity of matters, and the amount of work which is likely to be involved. New insolvency processes have introduced new decision processes including virtual meetings negating the need to have meetings physically attended by directors and creditors. If costs are settled in advance, creditor consent to the winding up can be obtained by deemed consent which is a simply yes or no response from creditors with no need to attend any meetings. 

We will discuss all charges with you and provide confirmation in writing.  Many firms’ base their costs on the chargeable rates of the Insolvency Practitioner and their staff.  The Business Debt Advisor has significantly lower charge out rates than many of our competitors, which enables us to provide fair value. 

The Risks of a CVL

No Prospect of Continued Trade

When a company enters into CVL, it is usually as a last resort, when the directors’ accept the business itself has no prospect of recovery.  The process will have a substantial impact on any market presence which might have been established through a long period of hard work. 

However, there could be an opportunity for the directors’ to purchase and retain some, or all, of the company’s assets by purchasing them from the Liquidator for fair value.  

Setting up a New Business 

Even where it is possible to purchase some of the company’s assets, for use in a new business venture, this will present the same challenges as with any other fledgling company.  The ability to overcome these challenges could depend on the way in which the failure of the insolvent company is dealt with.

Although CVL is the best option in certain circumstances, it should still be considered as a last resort, used only when the business cannot avoid failure.  

Redundancies

As mentioned above, all staff will be made redundant.  It is likely that these staff will quickly look for alternative employment, which could mean that any newly incorporated company will need to recruit from scratch, and lose recourse to inherent knowledge and skill.

Investigation into Directors’ Conduct

When any company enters into insolvent liquidation, the Liquidator is obliged to submit a report to the Director Conduct Report Service, in accordance with the relevant legislation.  

This report must be submitted by the liquidator within 3 months of appointment. In order to assist the Liquidator in discharging her obligations any person who acted as a director of the company, within the 3 years prior to the liquidation, will be asked to provide information to the Liquidator regarding their role in the business, and the events leading up to insolvency. 

If a director’s conduct falls short of accepted standards, this could result in a ban on that director acting as a director of any UK limited company, for a period of up to 15 years.  Additionally, it is possible that a culpable director could be required to make a contribution to the company’s debts.

Directors’ will only face such sanctions where their actions are severely lacking.  The best way to avoid accusations of adverse conduct is to consult with a licensed Insolvency Practitioner at the earliest opportunity, and act on the basis of professional advice received. 

Careful consideration must be given to all options available to a solvent company.  For more advice, fill out our  contact form and we will be in touch.