The Disadvantages of Creditors' Voluntary Liquidation
Every type of liquidation has obvious disadvantages, being that it is a procedure used to put a company out of business. A creditors voluntary liquidation (CVL) is one that is initiated by the directors of an indebted company as a way to concede to creditor pressures. The directors appoint a licensed insolvency practitioner as liquidator and then a creditors' meeting is held so that creditors can review and approve the liquidation process.
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.
Although a CVL does have its advantages, such as eliminating the hassle of dealing with repetitive phone calls and letters from creditors, it also has its disadvantages:
- Liquidator Fees
In a CVL the directors of the insolvent company will appoint an insolvency practitioner to serve their nominated liquidator during the procedure. The liquidator will charge a fee typically ranging from £4000-£7000 depending on the nature of the case and the amount of assets that need to be liquidated.
- No Chance of Recovery
When you enter into a CVL you concede to the fact that the business will not be recovering and is in fact going to be permanently dissolved. This means you'll be losing any brand recognition or market presence that you worked to establish. However, there is a chance to recover and retain some of the company's assets by having the directors of your company purchase them in a what is called a prepackaged sale of assets. Your directors might then be able to purchase those assets and use them in a new company in the process known as a pre pack administration.
- The Challenge of Starting Over
Even if it is possible to purchase some of the company's assets with through a pre-pack sale the process of starting over will still be challenging, especially if you have to carry on in the same industry with the reputation of having operated a failing business in the past. Although a CVL is a preferable solution in comparison to compulsory liquidation, it should still be viewed as a last resort option that is used only when you're certain that the business is headed for failure.
- Facing an Investigation
Finally, perhaps the most intimidating disadvantage of a CVL is the fact that you'll have to face a post-liquidation investigation conducted by the liquidator. You may be asked to furnish documentation and information regarding your activity as a director leading up to and during the time the company was insolvent. If you're found guilty of wrongful or fraudulent trading during this investigation you could be held personally liable for some of the company's debts, or you could face harsh fines and penalties, including a ban known as directors' disqualification that could forbid you from acting as the director of any limited company in the UK for up to 15 years. The best way to avoid such accusations is to consult with an insolvency practitioner immediately.
If you have any questions about the voluntary liquidation process please feel free to contact one of our licensed insolvency practitioners. You can also call our directors' support hotline on 0800 644 6080 for a free phone consultation. Real Business Rescue provide director advice online, over the phone, or in-person at one of our 78 UK offices or a place of your convenience.