Creditors Voluntary Liquidation
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What is a Creditors Voluntary Liquidation?
A Creditors Voluntary Liquidation (CVL) is the most common liquidation process for companies that are experiencing financial difficulty from which they cannot recover. If a company cannot pay its creditors (debts), doesn’t have enough funds to continue to operate, and is not able to benefit from a Turnaround & Rescue or administration procedure, the company can be placed into liquidation.
Once it is clear that there is no reasonable prospect of a company avoiding insolvent liquidation, company directors must take steps to ensure that the company is not trading whilst insolvent. In the event that a company continues to trade whilst insolvent, this is known as Wrongful Trading, which can result in personal liability for the directors.
How much does a CVL cost?
The fees can vary depending on the circumstances of the business. These circumstances could be related to the level of its debt, the number of shareholders that it has, or the cost of the assets that it has left.
It’s important when getting advice to understand the difference between licensed and unlicensed advisors. Unlicensed advisors will act as an unnecessary middle-man between you and a licensed practitioner. This will add unnecessary money and time to the process.
How should directors act in this situation?
Directors should not look to obtain any further credit when their company is insolvent. They should also be cautious when it comes to paying creditors back if they do not have the full amount required to pay everybody.
Appearing to favour one creditor over the other is not a good look for a business director because you could be classed as making a preferential payment. That could make you personally liable for any liquidation that follows. Any assets or money that belongs to the business should not be sold or moved out of the company at any cost, before this procedure has taken place.
What happens if I trade whilst insolvent?
If you know you’re insolvent and you continue to trade then you could find yourself personally liable for trading during such a period. You could seek guidance from a licensed Insolvency Practitioner and they will be able to talk to you about the available options. It’s important to ensure that you remain compliant in your duties as director of the insolvent company.
How can a CVL benefit my business?
A CVL closes a business and deals with all outstanding company debts through the process. The value of assets will be maximised to provide a substantial return to creditors and, while not all amounts will be able to be returned to creditors, the majority of the debt should be dealt with.
How do I place my company into a CVL?
A CVL can only be created under the assistance of a licensed Insolvency Practitioner (IP). An IP will be able to help you with good advice that you need to sort out your financial situation.
A CVL can only be entered into under the guidance of a licensed Insolvency Practitioner. An Insolvency Practitioner will be able to give you the sound, practical advice you need when dealing with a distressed company and you are highly encouraged to speak to one at the earliest signs of insolvency. They will be able to discuss the various options available to you and your company which may involve rescue and restructuring procedures such as Administration or a CVA.
How long does a CVL take?
It takes 14 days to put a company into a CVL, following the date it has been agreed. If 90% of shareholders agree to a short notice, liquidation can happen in half of that time (7 days). 7 days is the minimum statutory notice period to creditors.
What happens in a CVL?
1. Meeting of Board Directors and Sole Director
Once the directors have met and discussed the situation with a Licenced Insolvency Practitioner, they will have to meet and work out what is best for the good of the business – sorting out the finer details of what is going to take place.
2. Shareholder and Creditor Communication
Shareholders and creditors will both be affected by decisions that are made in the previous point. Any decisions on the future of the business are of course going to affect its investors; they will also affect creditors, who will be easier to see how and when they will start to be repaid.
3. Liquidation Begins
The general meeting of shareholders and the decisions of the relevant creditors will usually happen on the same day. 75% of shareholders must agree to liquidation if the company is to be wound up.
There is no longer a requirement to hold a creditors meeting in-person, as per the pandemic, unless it is requested by 10% of creditors in value or number, or simply by 10 creditors. Liquidation would ordinarily commence at 23:59 on the Decision Date, if the appointment of liquidators was approved. This can be done remotely with directors.
4. Process of Liquidation
The Insolvency Practitioner will continue to communicate with creditors during the liquidation of the company, resolving any issues regarding creditor claims and taking the necessary action to fix them. They would have to realise the company assets so that they can be used and distributed across outstanding creditors.
Assets will be independently valued, marketed, and sold to gain capital. A director of the insolvent company could purchase some of these company assets but they could only do so if negotiated through the IP.
There is a set order of priority of whose needs are to be met first, as noted in the Insolvency Act 1986.
What is the difference between a CVL and a CVA?
The key difference between a CVL and a Company Voluntary Arrangement (CVA) is that a company is liquidated and no longer trades in a CVL solution. A company will continue to trade within a CVA.
A CVA is only possible if your company looks like being profitable in the future. If it does not, a CVL might be the better route to go down.
Can creditors stop my CVL?
It is very unlikely that creditors will attempt to pull you out of the CVL as it is underway. After all, the CVL has to be agreed by creditors in the first place and those creditors will only agree to it if they see it as the best method of getting their money back.
What is the difference between a CVL and an MVL?
A CVL comes into fruition when an insolvent company enters into a voluntary liquidation. This is the opposite of an Members Voluntary Liquidation (MVL).
The directors and/or shareholders of the company decide to close their business in both of these options, however, the proceeds of the liquidation go to creditors within a CVL. In an MVL, they go to the members.
Can you turn an MVL into a CVL?
The liquidator must ensure that the company remains solvent throughout an MVL procedure. It’s possible that after the MVL is advertised publicly, additional creditors may come forward and submit claims against the company, turning it into a CVL. Alternatively, the valuation of contingent liabilities may reveal that prospective debts will push the company into insolvency. Whatever the cause, if the company does become insolvent or is found to be insolvent by the liquidator, a creditors’ meeting will be held and the procedure could turn into a CVL.
The liquidator has to make sure that the company remains solvent throughout the MVL process. It is possible that more creditors could come forward when they that the MVL is being advertised in the Gazette. This can turn the MVL into a CVL.
A creditors meeting will be held if the company does end up going insolvent, or is found to be insolvent by a liquidator, and this could force the MVL into a CVL.
Fines and penalties can be brought into the equation if creditors of the company swear a false Declaration of Solvency to enter into an MVL. This can include stopping people from acting as directors of a UK limited company for up to 15 years. If it is a case of international fraud, imprisonment could be a possibility for the perpetrator.
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Directors of insolvent companies have legal responsibilities to fill. A key obligation, once you know that your business is in an insolvent position, is to prioritise the needs of your creditors above everybody else. This means putting those who you owe money ahead of fellow directors and shareholders.
This means you should not be getting involved in anything that could worsen the position of your creditors. You must avoid adding to their financial losses. That means you must stop trading straight away because this could affect the position of your creditor in a negative sense. However, there are some ways that a company could continue to trade as an insolvent company, if you are able to prove that your work would be of benefit to creditors. This can be rather complex, though, so it makes sense to cross-check any scenario like this with a qualified insolvency practitioner.
Putting your company into a CVL one you know that it’s insolvent is illustrating your desire to protect those creditors. This is good as it shows you are acting as you should according to your legal duties.
Placing a struggling company into liquidation can also be a massive relief. If you have been dealing with angry creditors and customers worried about their future then this could be the best solution for you. After going into a CVL, any unpaid debt, that isn’t personally guaranteed, will be written off. Creditors will no longer be able to chase you personally for outstanding money. Upon entering a CVL, employees will also be allowed to receive redundancy pay – if they qualify for it.
A CLV cannot be reversed once it has been started. Directors of a closed company are able to purchase assets of the business that has gone into the CVL. This could be stock, premises, or the name of the business itself.
A CVL is a voluntary liquidation process that is there to bring an end to an insolvent company. It is worth noting, though, that liquidation is not only for insolvent businesses.
A Members Voluntary Liquidation (MVL) is for solvent companies that want to bring their business to a close. Putting a business into an MCL allows a company to extract proceeds in a tax-efficient and cost-effective way. It also allows the business to be wound down in a calm manner.
You must sign a declaration of solvency that demonstrates that the company is solvent and able to pay all of its outstanding creditors, if you want to go into an MVL solution. Lying in order to sign a declaration of insolvency is a very serious matter and you can get into big trouble.
With that in mind, it’s imperative that you talk to a fully licensed insolvency practitioner before you jump into any liquidation solution. They will be able to offer the best advice for you and your company, ensuring that you don’t make any life-changing mistakes when trying to find a solution for your situation.
While they do have similarities but liquidation and administration are NOT the same thing; they are two separate and distinct insolvency processes. Liquidation through a CVL creates the end of an insolvent company, however, the administration offers a chance of rescuing the business through restructuring and refinance.
Companies can be put into administration if there is a fair chance that the business – or sections of the business – can be rescued, or if an MVL looks like being a better solution for creditors than a CVL.
Administrations can provide a level of protection for a company that is distressed and faces the possibility of facing legal threats from frustrated creditors. A company is granted a moratorium when it enters administration, bringing any ongoing litigation to a halt while preventing any new legal action from being undertaken. At this moment, the appointed administrator should be a licensed insolvency practitioner, who will work to restructure the business in the best possible way – allowing it to continue trading.
It’s worth noting that administration is not a long-term position for a company to be in; it will have to exit administration at some stage. This could be through a sale, a continuation of trade, or through a different insolvency process. That process could be a CVL or a CVA if the business cannot be saved from its plight.
Following completion of the Creditors Voluntary Liquidation, the company will cease to exist as it will have been struck off the Company House register. Unpaid liabilities will be written off unless they were personally guaranteed.
Throughout liquidation, the liquidator must investigate any actions taken by directors and former directors within the last three years. If they do not do this properly, they could be found guilty of wrongful trading, fraud, or misfeasance. Such an act could result in directors being made personally liable for some or all of the company’s debts; they might also be disqualified from being the director of any company for up to 15 years. Nonetheless, such instances are very rare and directors are usually able to move on to a new business venture if they wish to do that.