Creditors' Voluntary Liquidation
A Creditors’ Voluntary Liquidation (“CVL”) is the most common form of director-led insolvency in the UK. It is a formal insolvency procedure that is used to deal with the affairs of an insolvent company that has reached the point of ‘no return’.
A CVL is appropriate when the company is insolvent and there is no reasonable prospect of trading on without the financial position worsening or the directors running the risk of wrongful trading.
Where the directors decide to commence CVL proceedings the company will normally cease to trade. Should trading continue, for whatever length of time, it is important to ensure that the company does not incur further liabilities.
The directors, generally with the assistance of a licensed insolvency practitioner, will convene meetings of members and creditors to appoint a liquidator and wind up the company’s affairs.
The members will appoint the liquidator but creditors at a subsequent meeting have the right to nominate their own choice of liquidator.
The liquidator’s duties are to realise the company’s assets, investigate the affairs of the insolvent company and where possible, utilise the funds to pay a dividend to creditors, after accounting for the costs of liquidation.
The CVL process may be used for limited liability partnerships (LLP’s) and companies limited by guarantee, such as not for profit organisations and charities.
- It allows the company to be closed promptly and in an orderly manner.
- By initiating voluntary liquidation, rather than waiting for the company to be wound up through the court, the directors control the timing of the process, which is likely to be critical if they wish to recommence trading, and have some control over who is appointed liquidator.
- It is possible for the directors to purchase assets from the insolvent company at market value and trade again in the same business.
- Employees will be entitled to recover, any redundancy claims (subject to limits) from the Redundancy Payments Fund.
- The business will cease trading and the directors will be prohibited from using the company name, or a similar name, in the future.
- Suppliers will lose money and may not be prepared to provide credit, or to trade, with a new company under the control of the same directors.
- The company’s directors will be personally responsible for any debts that they have personally guaranteed.
- Directors are responsible for the repayment of any overdrawn loan account.