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Difference Between CVL and MVL

When discussing the dissolution of companies, understanding the distinction between a Creditors’ Voluntary Liquidation (CVL) and a Members’ Voluntary Liquidation (MVL) is crucial.

These two processes are fundamentally different and are applicable under varying circumstances, serving distinct objectives, and initiated through different processes.

What's the difference between CVL and MVL

Introduction

When a business finds itself at a crossroads, facing financial difficulties or choosing to cease operations, liquidation often becomes a viable option.

However, the specific route a business takes through liquidation can significantly affect the company’s stakeholders, the legal proceedings, and the outcomes.

This comprehensive guide aims to distinguish the difference between CVL and MVL, shedding light on their distinct processes, implications, and considerations, thereby aiding directors and shareholders in making informed decisions. 

Understanding Liquidation

What is Liquidation?

Liquidation signifies the process through which a company dismantles its operations, converting assets to cash to settle debts with creditors and, if funds allow, distributing any remaining assets among shareholders.

This procedure marks the end of the company’s existence, a definitive closure of its financial and legal responsibilities. 

Types of Liquidation

The two principal types of voluntary liquidation are Creditors Voluntary Liquidation (CVL) and Members’ Voluntary Liquidation (MVL).

Each serves different circumstances and outcomes: one addressing insolvency and the other a strategic closure of a solvent company. 

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Creditors' Voluntary Liquidation (CVL)

Definition of CVL

CVL is initiated when a company is insolvent, meaning it can no longer meet its financial obligations as they fall due.

This form of liquidation is a voluntary step taken by the company’s directors after recognising that the company cannot continue its operations due to financial distress. 

Process of CVL

Decision to Liquidate 

The journey into CVL begins with the company’s directors deciding to wind up the company after careful consideration and consultation with shareholders, acknowledging that the business cannot sustain its financial liabilities. 

Appointment of a Liquidator 

A licensed insolvency practitioner is appointed to take charge of the liquidation process. This professional is responsible for overseeing the fair and orderly winding up of the company, ensuring that all legal and financial protocols are followed. 

Asset Liquidation 

The company’s assets are catalogued, valued, and sold. The proceeds from these sales are primarily used to repay creditors, adhering to a legally defined hierarchy of claims. 

Dealing with Debts 

After asset liquidation, creditors are paid in an established order of priority. If there are insufficient funds to cover all debts, certain debts may be partially paid or remain unpaid, with the latter being written off upon the completion of the liquidation process. 

Impact on Stakeholders

The primary aim of CVL is to facilitate a fair distribution of the company’s assets to its creditors, thereby minimising the financial harm to all involved parties and ensuring that the company exits the market responsibly. 

Members' Voluntary Liquidation (MVL)

Definition of MVL

An MVL is chosen when a company is solvent and capable of settling its debts but opts for liquidation due to strategic reasons, such as restructuring, acquisition, or the retirement of key stakeholders. 

Process of MVL

Declaration of Solvency 

The process initiates with the directors making a formal declaration of solvency, affirming that the company can pay its debts in full within a specified period, usually 12 months. 

Appointment of a Liquidator 

Similar to CVL, a liquidator is appointed in MVL, albeit under different circumstances. This professional’s role is to settle the company’s debts, liquidate assets, and ensure the surplus funds are distributed to the shareholders. 

Asset Distribution 

Once all debts are settled, any remaining assets are distributed among the shareholders according to their respective shares in the company, marking the final step in the liquidation process. 

Impact on Stakeholders

The essence of MVL is to close down a solvent company efficiently and beneficially, optimising the return to shareholders and ensuring a smooth and transparent dissolution. 

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Key Differences Between CVL and MVL

Solvency Status: A Fundamental Distinction

The primary difference between a CVL and an MVL lies in the solvency status of the company.

A CVL is initiated when a company is insolvent and unable to meet its debt obligations. It is a situation where the company’s liabilities exceed its assets, and it is no longer viable for the company to continue its operations.

The process is geared towards liquidating the company’s assets to pay off creditors to the extent possible, acknowledging that not all debts can be fully settled.

On the other hand, an MVL is pursued when a company is solvent, meaning it can pay its debts but chooses to cease operations for various reasons.

These reasons could include the retirement of the principals, a strategic business decision to consolidate or restructure, or simply a lack of desire to continue the business.

In an MVL, the company’s assets are liquidated and the proceeds are distributed among the shareholders after all debts and obligations have been settled in full.

Purpose and Outcome: Different Goals and Endgames

The purpose and ultimate outcome of a CVL and an MVL diverge significantly due to their differing contexts.

In a CVL, the aim is to wind up an insolvent company in a manner that is fair and equitable to its creditors. The process is creditor-focused, with the objective of maximising the returns to creditors from the company’s remaining assets.

While the directors initiate the process, the creditors have significant influence over the proceedings, including the appointment of the liquidator.

Conversely, an MVL is shareholder-focused. The goal is to dissolve a solvent company and distribute its net assets to the shareholders.

Since the company is solvent, the creditors are paid in full before any distribution to shareholders.

This process is typically smoother and faster than a CVL, as there are no disputes over debt repayments, and the focus is on efficiently winding up the company and distributing its assets.

Initiation Process: Strategic vs. Reactive Approaches

The initiation process for a CVL and an MVL also reflects their contrasting natures. A CVL is reactive, initiated in response to financial distress.

The directors of the company, upon realising that the company cannot continue due to its debts, opt for a CVL as a way to responsibly manage the company’s insolvency.

It involves a formal resolution from the directors, followed by a creditors’ meeting to approve the liquidation and appoint a liquidator.

In contrast, an MVL is a proactive and strategic decision. It is not driven by financial distress but by a calculated choice to close the company.

The process starts with a declaration of solvency, confirming that the company can pay its debts in full within a specified period. This is followed by a shareholders’ resolution to liquidate the company.

Since there are no disputes with creditors in an MVL, the process is more straightforward and often quicker, reflecting a strategic business choice rather than a forced response to financial difficulties.

Conclusion

Deciding between CVL and MVL hinges on the company’s financial health and strategic objectives.

This decision carries significant consequences for all stakeholders involved. Therefore, it’s imperative for directors and shareholders to grasp these differences fully, ensuring that their choice aligns with both their financial interests and legal responsibilities. 

By outlining the difference between CVL and MVL, this guide aims to equip company leaders with the knowledge necessary to make the best business decisions. 

If you need any further help and advice then contact our team of experts on our free phone number 0800 088 2142

 

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    Andy Slinger

    Andy is Head of Marketing for Business Helpline with a wealth of experience Marketing in the financial sector. He has a passion for helping business owners struggling with debts.

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