Advantages and Disadvantages of CVL
Introduction
Creditors Voluntary Liquidation (CVL) is a formal insolvency procedure where an insolvent company is voluntarily wound up by its directors with the help of licensed insolvency practitioners.
This process can provide various benefits and drawbacks to directors, shareholders, and creditors.
Advantages and Disadvantages of Creditors’ Voluntary Liquidation (CVL)
| Advantages | Disadvantages |
|---|---|
| Debt Relief | Loss of Business |
| Creditor Pressure Reduces | Director Accountability |
| Control Over Liquidation | Personal Guarantees |
| Potential to Trade Again | Public Record |
| Employee Claims | Costs Involved |
| Taking Proactive Action | |
| Ending Ongoing Company Obligations |
Advantages of CVL
- Debt Relief: CVL allows a company to write off its unsecured debts, providing significant relief to directors who can then move forward without the burden of these debts.
- Creditor Pressure Reduces: Once the company enters liquidation, the liquidator takes responsibility for dealing with creditors and company debts through the formal insolvency process.
- Control Over Liquidation: Directors can choose their own insolvency practitioner to handle the liquidation process, allowing them to retain some control over the proceedings and avoid compulsory liquidation.
- Potential to Trade Again: A director is not automatically prevented from starting or running another company after a CVL. In some circumstances, assets of the insolvent business may also be purchased at proper value, subject to insolvency rules and restrictions.
- Employee Claims: Employees, including directors, may be eligible for statutory entitlements such as redundancy pay, unpaid wages, and holiday pay through the Redundancy Payments Service (RPS).
- Taking Proactive Action: Seeking advice and dealing with insolvency promptly can help prevent creditor losses from worsening. Director conduct will still be reviewed as part of the liquidation.
- Ending Ongoing Company Obligations: The liquidator deals with company contracts, leases and other ongoing obligations as part of winding up the business.
Disadvantages of CVL
- Loss of Business: The company is ultimately closed, and employees will commonly be made redundant, which can have a significant impact on the workforce and local economy.
- Director Accountability: Directors may be held personally liable for any overdrawn director’s loan accounts and may face restrictions on reusing the company name for a period of five years. For more detail, see what happens to directors when a company enters liquidation
- Personal Guarantees: If directors have provided personal guarantees for company debts, they remain liable for these obligations even after the company enters liquidation.
- Public Record: The company’s liquidation is publicly recorded at Companies House and in The Gazette. Although a CVL does not automatically damage a director’s personal credit rating, the previous company failure may be relevant to future lenders or business partners.
- Costs Involved: The process involves professional fees for the insolvency practitioner, which can be substantial and may require assets to be liquidated to cover these costs.
Conclusion
Creditors Voluntary Liquidation (CVL) is a structured process designed to help insolvent companies manage their debts and close operations in an orderly manner.
While it can provide benefits such as an orderly closure, reduced creditor pressure and the opportunity to take proactive action, it also has consequences including loss of the company, director scrutiny, personal guarantees and public disclosure.
Directors considering CVL should weigh these factors carefully and seek professional advice to navigate the process effectively.
Frequently Asked Questions
Is a CVL good or bad for directors?
A CVL can provide an orderly way to close an insolvent company and deal with creditor pressure, but directors lose control of the company and their conduct will be reviewed. The individual impact also depends on issues such as personal guarantees and director loan accounts.
Does a CVL affect a director’s credit rating?
A CVL does not automatically affect a director’s personal credit rating because the company is a separate legal entity. Personal credit can be affected separately where, for example, a personal guarantee is enforced and goes unpaid.
Can I start another company after a CVL?
Usually, yes. A director is not automatically banned from running another company following a CVL, although restrictions can apply if the director is disqualified or wishes to reuse the same or a similar company name.
Is CVL better than compulsory liquidation?
Both procedures ultimately close an insolvent company, but a CVL allows directors to take action voluntarily rather than waiting for a creditor to obtain a winding-up order. The right option depends on the circumstances.
How Business Helpline Can Help
At Business Helpline, we offer expert advice and support to directors considering CVL.
Our licensed insolvency practitioners provide confidential consultations to discuss your company’s situation and help you understand the best course of action.
Contact us today for a free consultation and take the first step towards resolving your financial difficulties.
