Updated: 2nd November 2020
A Creditors’ Voluntary Liquidation (CVL) is a formal insolvency procedure which involves the directors of an insolvent company voluntarily choosing to bring their business to an end, and wind the company up. Although the process is entered into on a voluntary basis, it often follows the cumulation of many months of financial distress when the possibility of a successful turnaround has been extinguished. Even though this is far from an ideal situation, for an insolvent company which has no viable future as a profitable entity going forwards, voluntary liquidation by way of a CVL may be the best solution for all concerned.
There are two main tests to determine whether a company is insolvent; the cash flow test, and the balance sheet test. A company is cash flow insolvent if it cannot afford to meet its liabilities as and when they fall due, while a company which is balance sheet insolvent will have liabilities at such a level which outweigh its assets. If you believe your company to be insolvent, or believe that it will become insolvent, steps must be taken to mitigate the impact this will have on your outstanding creditors.
When a company is insolvent no further credit should be obtained and you should be extremely careful when it comes to making payments to creditors if you do not have sufficient funds to pay everyone you owe. Opting to pay one creditor to the detriment of another may be classed as making a preference payment and you could become personally liable for repayment of such sums in a subsequent liquidation. Additionally, any assets or money belonging to the business should be safeguarded and not be sold or otherwise moved out of the company.
Continuing to trade whilst knowingly insolvent is extremely risky, and you could find yourself being held personally liable for trading at such a time. Instead you should seek the advice and services of a licensed Insolvency Practitioner who will be able to talk you through the options available to the company and ensure you remain compliant in your duties as the director of an insolvent company, reducing your risk of wrongful trading or misfeasance.
While there are a range of formal insolvency procedures, such as administration and CVAs, which aim to turnaround the fortunes of a struggling company, in some cases a business will be beyond rescue and the best course of action is to wind it up via liquidation. This allows the directors to move on, and creditors to recover as much money as possible, where there are realisable assets.
A CVL brings the company to a close and deals with all outstanding company debts as part of the process. While asset realisations will be maximised in order to provide a return to creditors, where a company enters CVL there is likely to be a significant shortfall to creditors, however this will be written off upon the company being liquidated. The exception to this rule is for company debts which have been personally guaranteed . If you have signed a personal guarantee (PG) responsibility for paying the outstanding amount of this borrowing will remain with you personally and will not be written off.
A CVL should not be confused with Members’ Voluntary Liquidation (MVL) which is a liquidation option for solvent companies whose directors wish to extract funds in a cost-effective manner before bringing the company to a close.
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.
However, should the business be beyond rescue, or it is the preference of the directors and shareholders to close the company for good, a CVL is likely to be the most appropriate course of action.
Once the directors or a sole director have taken the advice of a licensed Insolvency Practitioner and have concluded to commence the liquidation process, they hold a meeting of the board or directors, or in the case of a sole director document a decision of a sole director, resolving to convene a general meeting of shareholders and a decision of creditors to place the company into liquidation (“Decision Date”).
It is at this point that the directors formally instruct a licensed Insolvency Practitioner to oversee the Liquidation process and draft the relevant documentation to commence the process.
Following the decision of the director(s) to commence the Liquidation process, shareholders and creditors will be notified of the general meeting and Decision Date respectively.
Prior to the Decision Date (the effective date of Liquidation), creditors will be presented with an Estimated Statement of Affairs of the Company. This is a document which sets out the financial position of the company, detailing its assets and liabilities, providing estimated realisable values of company assets and an estimated deficiency to creditors.
In addition a report is prepared by the Insolvency Practitioner providing a brief trading history, extracts from the company’s recent accounts and a deficiency account, detailing financial movements and assumed financial movements between the date of the last accounts and the date of liquidation. This report and the statement of affairs must be made available to creditors the day before the Decision Date, at the latest.
The general meeting of shareholders and Decision Date of Creditors will usually take place on the same day. In order for the company to enter liquidation at least 75% of shareholders must resolve to wind the Company up.
There is no longer a requirement to hold a physical creditors’ meeting, unless requested by at least 10% of creditors in value, 10% of creditors in number, or 10 creditors. In the absence of any such requests, the Liquidation commences at 23:59 on the Decision Date, with the appointment of the liquidators being deemed approved. This can be conducted remotely with the director(s), which removes an element of stress from the process.
During the liquidation of the company the Insolvency Practitioner will continue to liaise with creditors, resolve any issues related to creditor claims, and take the appropriate actions necessary to realise the company assets so that the proceeds can be used to distribute to outstanding creditors.
All assets will be independently valued, marketed and sold as appropriate. It is possible for the directors of the insolvent company to purchase assets of the company, as long as this sale is negotiated through the Insolvency Practitioner and they are purchased at market value.
The Insolvency Practitioner will also be responsible for collecting outstanding book debts, handling employee claims, issuing the necessary reports to government agencies, and distributing available funds to creditors. There is a set order of priority laid out in the Insolvency Act 1986 which must be followed when funds are being allocated to creditors. Secured creditors with a fixed charge are first in line for payment, followed by preferential creditors (including staff due arrears of wages), and then secured creditors with a floating charge (subject to any deductions for the Prescribed Part).
Unsecured creditors, such as suppliers, customers, and HMRC are next in the pecking order, although unfortunately at this stage there is unlikely to be sufficient remaining funds to allow for significant returns to be made.
Upon completion of the CVL, the company will be struck off the register held at Companies House and the company will cease to exist. Any liabilities which remain unpaid by the company will be written off, unless they were personally guaranteed.
During liquidation the liquidator is required to investigate any actions taken by the directors (and former directors within the last 3 years). If it is found that they did not fulfil their fiduciary duties while knowingly insolvent, or conducted transactions which were to the detriment of creditors and challengeable, they may be found guilty of wrongful trading, fraudulent trading or misfeasance. This could result in the directors being held personally liable for some or all of the company’s debts, and they may be disqualified from acting as the director of any company for a period of up to 15 years. However, this is extremely rare and in the vast majority of cases, and directors are free to move on and even set up another business if they so wish.
Call us today to arrange a free consultation and find out how we can help you and your company navigate its way out of distress. Whether your aim is to rescue the business, or alternatively if you are looking at ways to wind up your company on a voluntary basis, we can help. With 86 offices across the country Real Business Rescue can offer unparalleled director advice no matter where in the UK you are based.