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How Does a Creditors Voluntary Liquidation (CVL) Work and What Is Its Effect on the Business?


A creditors’ voluntary liquidation (CVL) is a procedure in which the company's directors choose to voluntarily bring the business to an end by appointing a liquidator (who must be a licensed insolvency practitioner) to liquidate all of its assets. This differs from a compulsory liquidation, which is forced upon an insolvent company via a winding up order made by the Court. The following 4-step guide describes how a creditors’ voluntary liquidation works and how it affects the company and its directors:

  • The Directors Contact an Insolvency Practitioner
     
  • Alternative Options are Considered
     
  • A Creditors' Meeting Is Held and a Liquidator is Appointed
     
  • The Company's Assets Are Liquidated

Step 1 – The Directors Contact an Insolvency Practitioner

First, the directors of the company contact an insolvency practitioner who will most likely be appointed as the liquidator during the creditors’ meeting. During the initial consultation the insolvency practitioner will ask a few basic questions in an effort to determine whether a CVL is the most ideal option for the company. Of course, if the directors have the intent of ending the company, liquidation will be the best course of action.

Step 2 – Alternative Options are Considered

If the directors are interested in the possibility of keeping the company in business, but are concerned that there is no way to escape insolvency and repay outstanding debts, the insolvency practitioner may introduce them to a couple of alternate options, including Company Voluntary Arrangement (CVA) and pre-pack administration.

A CVA is a formal payment plan that the insolvency practitioner drafts and the company then proposes to its creditors in an effort to reach an formal agreement. If successful, the CVA will make it much easier for the insolvent company to recover from its debts without being would up.

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Keith Tully
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When being quoted low fees for liquidations, the saying that comes to my mind is “If it looks too good to be true, then it usually is” please be careful as the outcome may not be what you had hoped for.
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A pre-pack administration would involve the company selling all or some of its assets in order to raise the funds needed to repay some of the creditors (with secured creditors taking priority). The sale of assets is prearranged before an administrator is appointed so the entire process is streamlined and the business does not need to cease operating. In fact, the directors of the insolvent company can even form a new company that would then buy the assets from the old company, allowing the insolvent business to begin operating as a new company free of debts.

Step 3 – A Creditors' Meeting Is Held

If the insolvency practitioner and directors come to the conclusion that a CVL is the preferred course of action then a report will be put together and circulated to all known creditors. There is no longer a requirement to hold a physical creditors’ meeting which takes the stress out of the process.

The Company will enter into liquidation on a deemed date which is normally within 14 days from the date the report is circulated to creditors. Therefore, it is both quicker and easier to draw a line under the matter. Creditors can require a physical meeting to be held provided that they meet certain criteria.

Step 4 – The Company's Assets Are Liquidated

During the liquidation of the company the insolvency practitioner (liquidator) will continue to liaise with creditors, resolve any issues related to creditor claims, and take the appropriate actions necessary to sell the company’s assets. The liquidator will also commence collection of any outstanding book debts, handle employee claims, and issue the necessary reports to government agencies.

How the Company and Its Directors Are Affected

Obviously, the company will cease to exist after liquidation, but what about the directors? During liquidation the liquidator is required to investigate any actions taken by the directors during the time the business was insolvent. If it is found that they did not fulfil their fiduciary duties while trading insolvently, they may be found guilty of wrongful trading. This could result in the directors being held personally liable for some or all of the company’s debts, and they may be banned from acting as the director of any company for a period of upto 15 years.

You  may also wish to read up further about members voluntary liquidation otherwise known as a MVL 

Call us today to participate in a free consultation and find out how we can help you liquidate your company quickly and easily. We can also assess your situation and recommend a more suitable course of action if you’re interested in preserving the business. 

The business had been struggling financially, but we were able to advise that administration and a subsequent sale was the best course of action. We are pleased we have been able to secure the majority of what is a long-standing leisure business.
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