What are the Advantages of a Creditors Voluntary Liquidation (“CVL”)?
There is more to a CVL than the removal of creditor pressure and the prevention of legal action. Plus, a CVL does not mean a director will never work again.
The latest Insolvency Service statistics for Q1 2023 showed that insolvencies remain close to the highest level recorded since 2009. Of these, the Creditors Voluntary Liquidation was by far the most common formal process used to close down an insolvent company. Given the current significant strains on companies, these figures come as no surprise.
As Insolvency Practitioners we have acted as Liquidator for hundreds of Companies that have gone into CVL in the over 25 years we have been in business. We know how stressful the lead up to insolvency is and how difficult the decision by directors to liquidate can be. It is also usually the case that directors do not know all of the details of what a CVL is and the wider implications. Most directors are aware of the key facts that once a formal liquidation process is started, legal action is prevented and pressure from unsecured creditors ceases, but there is much more to consider. In this article, we look at the main advantages of Creditors’ Voluntary Liquidations.
Why choose a Creditors Voluntary Liquidation?
- By choosing a Liquidator, directors regain control of the situation through to liquidation. Once the decision is made to enter a CVL, the directors are free to choose their own Liquidator initially (although if the creditors disagree with the choice, they can appoint a different Liquidator at the creditors’ meeting). The CVL process is then set in motion and it cannot be objected to by creditors.
In a CVL, the company also avoids being wound-up by creditors through the courts and being forced into a compulsory liquidation, where the Official Receiver (a government official and officer of the Court) takes control.
75% of a company’s shareholders must agree to any proposal to enter into a CVL, which will end up with the liquidation of the company, at which stage the directors have no further control of the Company. Take a look at our infographic that shows the processes involved in a Creditors’ Voluntary Liquidation.
- Pressure from unsecured creditors ceases. Once the formal liquidation process begins, all unsecured debt falls within the liquidation estate and any claims are made to the Liquidator. This is because once the CVL process starts, the responsibilities of the directors stop and all responsibility passes to the Liquidator who deals with all matters relating to the Company going forward. The only exception to this would be any debts secured by personal guarantee.
- Any current or future legal actions are defended by the Liquidator upon entering a CVL, thus removing that stress from directors. This covers County Court Judgements and Winding Up-Petitions,
- A director can continue to be, or become, a director of other companies. This is even after a company they have been director of has gone into liquidation. We often find this is not widely known, with many directors fearing that liquidation will mean they might never work again. A caveat is that if the Liquidator uncovers evidence that the insolvency has been caused by a director not fulfilling their statutory duties, then that can trigger a director disqualification investigation by the Insolvency Service, which could result in a director disqualification period of up to 15 years, under the Company Directors Disqualification Act, 1986.
- Leases can be cancelled. Once the liquidation process begins, the Liquidator may disclaim any property lease.
- Employees may be entitled to claim statutory redundancy entitlements. Although all employees are made redundant when a company enters a CVL, they can claim statutory redundancy entitlements and other payments even though the insolvent Company is unable to pay them their entitlements, as such funds come from a Government backed Redundancy Fund that covers all contractual employee claims against the Company. Take a look at this article for more details on claiming statutory redundancy.
- Directors can continue to trade through a different company. It is possible to liquidate a company and continue to trade the business through a newly registered or existing company. This is called a pre-pack liquidation, and there are procedural hoops that need to be addressed and assets valued and paid for if there is a continuance of trade or re-trading of some or all of the business. Professional advice must be taken and Court leave may need to be sought to use the same or a similar name.
How Antony Batty and Company can help
We have the experience and expertise to make the chosen insolvency process as painless as possible and will ensure that the correct process used is right for the circumstances in play which can sometimes be complex. As ever, the earlier we are contacted, the more we can do to help. So, if your company is experiencing some or all of these warning signs, get in touch:
- HMRC Debt
- Can’t pay Bounce Back Loans
- Falling margins as costs rise
- Being unable to pay bills on time
- Cash flow problems
- Stress and sleepless nights
If you are concerned about the financial position of your company and are facing insolvency, please contact ElaineWilkins at our Bournemouth office on 01202 923009