A Creditors’ Voluntary Liquidation (CVL) is a procedure used to wind up an insolvent Company where the value of the assets of the Company are insufficient to pay all its debts and it in effect becomes insolvent. At the commencement of the process, the decision to proceed with a CVL – and therefore liquidate a Company – occurs where there is a meeting of shareholders, (usually at the company directors’ request), who then decide to put a Company into Liquidation because it is not able to pay its debts, the assets and liabilities being out of balance. At the end of the process the Company is liquidated, and the Company is struck off the Companies House register.
Once under way, a CVL is under the effective control of the creditors, who can appoint a Liquidator of their choice. At this stage, the powers of the directors and shareholders are terminated.
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What is a Creditors Voluntary Liquidation?
Tom O’Keeffe, Insolvency Administrator explains about Creditors Voluntary Liquidations
Did you know? Once under way, a CVL is under the effective control of the creditors, who can appoint a liquidator of their choice. At this stage, the role of the directors is terminated.
When is a CVL used?
A CVL is the most common way for directors and shareholders to deal voluntarily with their Company’s insolvency.
Ultimately it is the directors that commence the proceedings in a CVL. The directors formally resolve that the Company cannot continue to trade because of its debts, and they nominate a Licensed Insolvency Practitioner – as the Liquidator – who assists the directors in the preparation of a statement of affairs to be presented to the creditors.
Before a Company reaches the liquidation stage, its financial health is usually already in a state of distress, due to cash flow problems, falling margins, the need to have extended creditor days, which often lead to higher interest payments, defaulting on bills, etc. Whilst in the financial distress stage, it is still possible to restructure and turn things around if help is called in quickly enough. Recovery options include a Company Administration or a Company Voluntary Arrangement (CVA).
However, if things do not improve, then distress turns into a crisis, and that is when the Company’s debts – the money that it owes to its creditors – are at a level which means that Liquidation is the only real option. Our team will guide you through the whole process.
A quick guide to the CVL process
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Liquidation FAQs
By choosing a Liquidator, directors regain control of the situation through to liquidation. Once the decision is made to enter a CVL, the directors are free to choose their own Liquidator initially (although if the creditors disagree with the choice, they can appoint a different Liquidator at the creditors’ meeting). The CVL process is then set in motion and it cannot be objected to by creditors.
In a CVL, the company also avoids being wound-up by creditors through the courts and being forced into a compulsory liquidation (all claims against the company being dealt with), where the Official Receiver (a government official and officer of the Court) takes control.
If you have an outstanding debt, such as a Bounce Back Loan (for example) or are in arrears to HMRC, then a strike-off application will likely be rejected, meaning the only option is for a Creditors’ Voluntary Liquidation.
Pressure from unsecured creditors ceases, this alone making it one of the best debt solutions available. Once the formal liquidation process begins, all unsecured debt falls within the liquidation estate and any claims are made to the Liquidator. This is because once the CVL process starts, the responsibilities of the directors stop and all responsibility passes to the Liquidator who deals with all matters relating to the Company going forward. The only exception to this would be any debts secured by personal guarantee.
Any current or future legal actions are defended by the Liquidator upon entering a CVL, thus removing that stress from directors. This covers County Court Judgements and Winding Up-Petitions,
A director can continue to be, or become, a director of other companies. This is even after a company they have been director of has gone into liquidation. We often find this is not widely known, with many directors fearing that liquidation will mean they might never work again. A caveat is that if the Liquidator uncovers evidence that the insolvency has been caused by a director not fulfilling their statutory duties, then that can trigger a director disqualification investigation by the Insolvency Service, which could result in a director disqualification period of up to 15 years, under the Company Directors Disqualification Act, 1986.
Leases can be cancelled. Once the liquidation process begins, the Liquidator may disclaim any property lease.
Employees may be entitled to claim statutory redundancy entitlements. Although all employees are made redundant when a company enters a CVL, they can claim statutory redundancy entitlements and other payments even though the insolvent Company is unable to pay them their entitlements, as such funds come from a Government backed Redundancy Fund that covers all contractual employee claims against the Company. Take a look at this article for more details on claiming statutory redundancy.
Directors can continue to trade through a different company. It is possible to liquidate a company and continue to trade the business through a newly registered or existing company. This is called a pre-pack liquidation, and there are procedural hoops that need to be addressed and assets valued and paid for if there is a continuance of trade or re-trading of some or all of the business. Professional advice must be taken and Court leave may need to be sought to use the same or a similar name.
There are 3 main scenarios where this is possible. Firstly, you can apply to the Court for permission to do so, but this must be done within 7 days of the liquidation. Secondly, it is possible to reuse the name if you buy the business from the liquidator, but creditors must be informed and an advertisement placed in the Gazette. Thirdly, if the company has used the name for at least 12 months before the liquidation took place, you may be able to continue to use the name as long as it wasn’t a dormant company during this time.
Outside of these 3 reasons, the answer is no and there are serious repercussions for doing so. This whole area is dealt with in section 217 of the Insolvency Act 1986.
