If a company is insolvent, the shareholders can opt to go through a creditors’ voluntary liquidation (CVL).
A CVL is a quick yet powerful way to close a business whilst also ensuring that everything is dealt with legally and properly.
But how does the creditors’ voluntary liquidation process work? What are the benefits of a CVL? What does it mean for your employees? And what does it mean for you, the director? We answer your most popular CVL FAQs in this blog…
Your top FAQs about the creditors’ voluntary liquidation process, answered:
Who initiates a CVL?
A creditors’ voluntary liquidation is typically started by the directors of a company. They will inform the shareholders that the company is no longer viable, and the shareholders will then enlist the help of a licensed insolvency practitioner to call a creditors’ meeting as soon as possible.
Why might a CVL be considered?
There are several reasons why a CVL might be considered the most suitable option for your business, including the following:
- The company has run out of cash.
- Creditors are threatening legal action or a winding up petition.
- The company is no longer viable.
- The company cannot pay its debts on time.
- The directors are concerned that the business may build up more debts.
What are the benefits of a CVL?
There are a number of benefits to entering into voluntary liquidation. For starters, it is seen as a positive for creditors because it shows that you are putting their interests first, and what’s more, they will also be reassured that they will receive at least some repayment through the sale of the business assets.
Additionally, with a CVL, you will have more control than with a compulsory liquidation because you will appoint the liquidator rather than the creditors. Finally, it’s also much quicker than a compulsory liquidation, with the initial meeting of creditors typically taking place within just two to three weeks.
How does the process work?
In order to enter a CVL, the company must pass a special resolution under the Companies Act 2006 declaring it is unable to continue trading due to its debts and liabilities.
A date is agreed for the company to enter liquidation and providing creditors do not object to the proposed liquidator, the liquidation commences on that day. If required, a meeting with the creditors will take place, and a liquidator will then be appointed.
The entire creditors' voluntary liquidation process works as follows:
1. The directors’ meeting
Once you have decided that liquidation is the right decision for you, a meeting must be held with the board of directors resolving to convene a meeting of shareholders and a decision to place the company into liquidation. A licensed insolvency practitioner (IP) will then be appointed to oversee the liquidation process.
2. Shareholders and creditors are notified
The shareholders and creditors will then be notified, and the creditors will be presented with an Estimated Statement of Affairs. This is a document which sets out the financial position of the company, including its assets and liabilities and the estimated value of the company assets.
A report will also be prepared by the directors providing a brief trading history and the financial movements of the company between the date of the last accounts and the date of liquidation.
3. Liquidation commences
The meeting of shareholders will then take place. In order for the company to enter liquidation, at least 75% of the shareholders must resolve to wind the company up.
4. The liquidation
During the liquidation process, the IP will liaise with the creditors and realise the company assets so that the proceeds can be used to pay outstanding debts. All the assets will be independently valued, marketed and sold as appropriate.
The IP will also be responsible for collecting outstanding book debts, dealing with employee claims, issuing any necessary reports and distributing any available funds to creditors as per the order of priority laid out in the Insolvency Act 1986.
So, how long does it take in total?
The appointment of a liquidator usually takes between one and two weeks, and if 90% of shareholders agree, it is possible to enter liquidation in just a few days.
However, with investigations to complete, paperwork to file and assets to sell, it could take 12-18 months. Generally speaking, the bigger the liquidation, the longer it takes.
And how much does it cost?
The cost of a CVL also depends on the complexities of the case and how long it takes the IP to carry out their duties.
The main things to consider when it comes to cost are the number of creditors, how much is owed, how many employees there are, whether there are any book debts to collect, and how much investigation is needed into the company’s affairs.
Directors can often be put off by the possible cost of a liquidation, but when it comes to how much you need to pay, one thing is for sure – the longer you leave things, the worse it will become!
What will happen to my employees?
If your company enters into a CVL and there is no money left for your employees, they will receive a redundancy notice from the Redundancy Fund, and they will also receive payments in lieu of notice, holiday pay and any salary arrears, capped to £538 per week.
However, it’s important to note that the government can also claim in the liquidation for these costs.
Can I not just pay my employees and then close the company?
Not if you don’t want to break the law! According to the rules of preference as laid out in s239 of the Insolvency Act, doing so would put your employees in a better position than they would have been.
If it can be proven that there was a desire to make them better off, this could be deemed a preference payment, and your employees would then be made to pay the money back to the liquidator!
Can I restart the company after a CVL?
Yes, liquidation and restart are achievable using a CVL – and what’s more, it can be done smoothly, quickly, and within the law. When a company is liquidated, its contracts come to an end – but the business itself can be uplifted into a new company.
Can a CVL ever be reversed?
If, for some reason, funds are found to pay back the creditors in full, then it is possible to stop the process as long as the company assets haven’t already been sold and the resolution to wind up the company has not yet been passed.
However, this is extremely unlikely to happen – and it might make more sense to allow the company to go into liquidation but buy back the assets at a fair value.
So, what happens when the CVL is completed?
When all the company assets are sold and the CVL is complete, the company is struck off and ceases to exist. The debts belong to the company, and as such, the liability for the debts die with it. However, if the directors have personally guaranteed the company liabilities the creditors will be able to claim on these.
Do I have any alternative options?
If you are thinking about liquidating your company due to financial difficulties, it’s important to make sure that you have weighed up all of the options available to you before proceeding.
For example, a company voluntary arrangement or pre-pack administration could provide an alternative way for you to carry on trading. So be sure to seek expert advice and weigh up all your options before making a final decision.
How McAlister & Co can help
With over 20 years of experience, at McAlister & Co there’s nothing we don’t know about CVLs and business insolvency. Times of financial uncertainty can be stressful, but with McAlister & Co, you don’t have to face financial difficulty alone.
Call us now on 03300 563 600 or contact us here for initial advice on the creditors’ voluntary liquidation process, or alternatively, you can download our free guide to creditors’ voluntary liquidations here.