Creditors Voluntary Liquidation


What is a CVL?

In business, a CVL is a Creditors’ Voluntary Liquidation.

What is Company Creditor Voluntary Liquidation?

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.

The Creditors Voluntary Liquidation (CVL) process

▪️Initial advice meeting with an ICS licensed insolvency practitioner

▪️A board meeting is held where directors come to the conclusion that the company cannot continue trading and that the company should therefore be placed into CVL

▪️A Statement of Affairs is produced (this is a document that states the company’s assets and liabilities) and is signed off by the company’s directors

▪️The Statement of Affairs is supported by a narrative report which includes the company’s background and events leading to liquidation – these documents are circulated to shareholders and creditors

▪️A Shareholders’ meeting is convened to consider the resolution to place the company into liquidation, the resolution must be passed by 75% of shareholders voting in favour

▪️It is the responsibility of a company’s creditors to confirm the appointment of a liquidator, this is carried out via a statutory decision procedure, either a virtual creditors meeting or using the deemed consent procedure (creditors representing certain threshold criteria can request a physical creditors meeting)

▪️Once in liquidation, it is the liquidator’s responsibility to realize and distribute the company’s assets.

In practice, following the initial advice meeting, ICS will put together all the relevant paperwork and documentation to place the company into liquidation. This includes producing the board meeting minutes and notices, preparing the Statement of Affairs and supporting report, liaising with shareholders and creditors, and dealing with the formalities of the shareholders meeting and creditor decision procedure (and creditors meeting if applicable).

When is a company insolvent?

Companies should look to complete two tests on their business: the cash flow and the balance sheet. If a company cannot financially meet its liabilities then it will be insolvent. A company with a balance sheet will have liabilities that far outweigh the assets that it owns. You must start to take steps as soon as you believe your company to be insolvent.

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 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.

Why should I go into a CVL?

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.

Can you reverse a CVL?

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.

What is the difference between liquidation and administration?

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.

What comes after the CVL?

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.

Check if you qualify for a CVL

What is a Company Voluntary Arrangement?

Company Voluntary Arrangements (CVA’s) are used in cases where the company is currently in trouble, but appears to be viable and could well become profitable again. In layman’s terms, all the company debt is moved into one manageable monthly payment, so that the company can continue trading without the burden of winding-up petitions or liquidations being threatened. This allows you to move forward without the pressure.

Benefits of a CVA

▪️Pressure from creditors and HMRC is relieved

▪️Legal action cannot be taken by creditors

▪️All payments to creditors will be centralised into a single monthly payment

▪️Company directors and shareholders do not lose control of the business

▪️The CVA is not public information: advertisement in the London Gazette is not required

▪️Once your Company Voluntary Arrangement is in place your creditors can no longer add further interest or charges to any of your accounts covered by the agreement

▪️Can stop a winding up petition from becoming successful

▪️Cash flow is inevitably improved with reduced payments

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Eligibility criteria for a CVA

▪️Do you have a business?

▪️Do you have business cash flow issues?

▪️Do you have debts of £4,000 or more?

▪️Are you able to make some form of monthly contribution to your debts?

▪️Is the stress and worry of debt becoming too much to handle? Do you need free and impartial advice from an industry expert?

What is Members Voluntary Liquidation?

Members Voluntary Liquidation (MVL) or Solvent Liquidation is a process that is generally a tax-efficient way of shareholders extracting funds from a company that has ceased to trade. Typical MVL clients have either sold their company’s business and the limited company is cash-rich, or companies which have run their course and the shareholders want to realise their investment in the most tax-efficient way possible, liquidating the business assets.

What is a solvent company?

A company can be regarded as a solvent when it is able to pay all liabilities in full, as well as statutory interest and any costs involved with the winding-up procedure, within 12 months from the Declaration of Solvency.

Why would a company choose Solvent Liquidation?

Generally, MVL is a tax-efficient process for shareholders of a company to realise their investment, such as the company’s assets, via a capital distribution. The shareholders may qualify for Entrepreneurs Relief, subject to meeting certain criteria, and this means that their returns are subject to tax at a much lower rate than usual.

In most instances, the company will have ceased trading and all creditors/liabilities will have been settled, all or most physical assets will have been sold, with the company’s only asset, therefore, is made up of cash at the bank.

If there are any remaining assets that need to be realised, they can be dealt with through the liquidation process. This involves taking steps with the liquidator to sell the asset or distributing the asset to the shareholders.

The solvent liquidation process

▪️Ideally, the company will have ceased to trade and final accounts will have been prepared by the company’s accountant and signed off by the directors. Additionally, it is beneficial in most cases for all tax (and other) liabilities to have been settled, otherwise, interest at 8% per year begins to accrue from the date of liquidation.

▪️A formal Declaration of Solvency must be produced. This document will provide details on the company’s assets and liabilities, which will prove that the company is both solvent and has the ability to repay its creditors, with statutory interest, in a maximum of 12 months. The company’s directors must swear the documents in front of a solicitor, confirming they believe its content to be true.

▪️A board meeting is held at which the decision is made to recommend to the shareholders that the company be placed into a solvent liquidation, the directors will sign off all relevant notices required to commence the MVL procedure.

▪️A General Meeting of shareholders is held at which shareholders will resolve to place the company into a solvent liquidation, so long as 75% of shareholders are in favor, as well as other resolutions relating to the distribution of the company’s assets.

▪️It is the role of the appointed liquidator to settle any outstanding debts with creditors (if any) before distributing the company’s assets amongst the shareholders.

▪️The liquidator must obtain clearance from government departments to confirm that they have no objection to the liquidation being completed.

▪️Following the filing of the liquidator’s final report at Companies House, the company is removed from the register three months later and is dissolved.

What is the difference between a CVL and an MVL?

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.

Frequently Asked Questions

Debts included in business debt solutions

Most unsecured debts can be included. Secured debts, like mortgages, cannot be included. Other debts which are excluded include:

▪️Court-ordered payments, such as fines, compensation, penalties or forfeiture orders
▪️Family, aliment, or child support payments
▪️Student loans
▪️Any debt owed due to fraud, such as benefit fraud

Creditor expectations

Creditors will not agree to a plan if they do not think is fair. This means that if they think that an individual can pay more back than they have offered to under the terms of the plan, the creditor will refuse to agree to it. They may also refuse to agree if they believe that an individual should be made bankrupt.

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