What is a Creditors’ Voluntary Liquidation, and when should it be considered?

A Creditors’ Voluntary Liquidation (CVL) is a voluntary process enabling the formal end of an insolvent company.

The process is initiated by the company through its director(s) and should be considered when one, or all, of the following, are true:

• The company’s liabilities exceed its assets (balance sheet insolvency);
• The company is unable to pay its debts as they fall due (cash flow insolvency); and
• A statutory demand has been issued by a creditor for an unpaid debt of more than £750, and that demand has not been met or has not been appealed.

Why choose a CVL?

A CVL is a useful tool for directors when a company faces irrecoverable financial difficulty and when mounting creditor pressure (i.e., from landlords, suppliers or HMRC) is causing financial stress. A CVL allows directors to take swift control of the situation, which mitigates their personal risk, to orderly wind down a company’s affairs. The measure can also alleviate stress and anxiety and avoid court involvement.

A CVL brings the company to a close and deals with all outstanding company debts as part of the process. The liquidator’s objective is to maximise asset realisations in order to provide a return to creditors. However, where a company enters CVL, there is likely to be a significant shortfall to creditors, but this will be written off. The exception to this rule is for company debts which have been personally guaranteed by any third party. If you have responsibility for paying any personally guaranteed debts, these will remain with you personally and will not be written off.

Unlike a Compulsory Liquidation (usually initiated by one or more creditors through the court), a CVL allows the director(s) the choice of liquidator, subject to ratification from the company’s creditors.

How long does a CVL take?

Pre-Liquidation

The process to place a company into liquidation can be actioned in a reasonably brief timeframe – realistically within a couple of weeks.

Post-Liquidation

The duration of the formal liquidation can vary depending on the size of the company, the complexity of the case, and the nature of the assets. An average estimate for duration could be between 9 and 18 months, though director involvement largely wanes after the initial 3 months or so.

Directors’ responsibilities

It is important for directors to take early action to limit exposure to potential risk. Once a company becomes insolvent, directors have a duty to minimise losses to the creditors of the company, otherwise they can be liable for wrongful trading.

Wrongful trading is defined by section 214 of the Insolvency Act 1986 as when directors continue to trade when:

• They knew, or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation; and
• They did not take every step with a view to minimising the potential loss to the company’s creditors.

If a director is found to have engaged in wrongful trading, they could be found personally liable and ordered to pay financial compensation from their personal assets to the liquidation estate.

When a company is insolvent, directors should not obtain any further credit and should ensure the security of current assets while not disposing of any. Directors should also take advice before making payments to specific creditors, as these can constitute offences that directors may be personally liable for.

Directors can be disqualified for a period of up to 15 years – a clear reminder of why early advice is paramount to mitigate risk.

How we can help

If you have any questions regarding CVLs, or any other restructuring and insolvency process, please contact the experienced team at Moore Kingston Smith Licensed Insolvency Practitioners. Our team can offer practical, down-to-earth advice to help ensure reasoned solutions for your business.