Closing a company can be a difficult affair, but closing an insolvent company has unique issues that need to be dealt with in a certain way. The process must be handled carefully, with directors obligated to act in the interest of their company’s creditors (i.e. the people who they owe money to). Given the sensitivity and complexities of the situation, most directors opt for a professional solution.
The solution most often settled on is a Creditors’ Voluntary Liquidation (CVL). This is a formal insolvency procedure that helps directors close their company when continuing operations is not financially feasible. The procedure offers significant advantages to both directors and the company’s creditors.
In this article, Clarke Bell will discuss the CVL procedure and give you the information you need about the process.
What is a Creditors’ Voluntary Liquidation?
A CVL is a formal insolvency procedure that offers directors a means to liquidate their insolvent company – i.e. a company which cannot pay its debts. For directors of such companies, a CVL has considerable advantages. A licensed insolvency practitioner will be appointed to carry out the procedure on behalf of the company’s directors, ensuring it is carried out lawfully. Their role will be to dispose of a company’s assets and distribute any proceeds to its creditors. At the end of the process, the company will be wound up and cease to exist.
Advantages of a Creditors’ Voluntary Liquidation
CVLs are widely used to liquidate insolvent companies. The process has significant advantages, both for company directors and its creditors, including:
Companies are closed legally and efficiently
The CVL procedure is carried out by a licensed insolvency practitioner who specialises in liquidating companies. This offers creditors and directors a guarantee; the company will be liquidated efficiently and to a professional standard, fully adhering to insolvency laws. Directors can rest easy knowing their company will be closed properly, and creditors can expect to receive their money, if the company has sufficient assets to make any payments.
Directors retain control
Unlike with a compulsory liquidation, in a CVL much of the control in the hands of directors. They decide when and if to initiate the CVL procedure, and they appoint an insolvency practitioner of their choosing. This better equips directors to decide the fate of their company.
Obligations to creditors are upheld
If handled poorly, the liquidation of an insolvent company can land directors in hot water. Outstanding creditors can allege that directors have not acted in their best interests, which could lead to directors being investigated for wrongful trading. If found guilty, this can have significant consequences, ranging from fines and the disqualification of directors’ licenses through to a prison sentence.
Under a CVL, this risk is severely reduced. A CVL aims to liquidate the company in order to pay off outstanding debts to creditors, debts that could not be paid if the company were to continue operations. As such, directors opting for this course of action demonstrate a willingness to act in the best interests of creditors, sheltering them from accusations of wrongful trading or misconduct.
Outstanding debts can be written off
If any debts remain after all assets have been realised, yet there are no funds left to repay them, these debts can be written off. This means that creditors cannot pursue directors for repayment after the CVL procedure has concluded. The directors are then in a position whereby they can start afresh.
Disadvantages of a Creditors’ Voluntary Liquidation
Although it offers significant advantages, the CVL procedure is not without fault. Before deciding on it as your preferred course of action, you should first consider the disadvantages. The most notable are:
Your company will be shut down
Although obvious, it is worth underlining the fact that your company will cease to exist should you opt for a CVL. As such, it is best reserved for when your debt problems are so severe that other solutions are simply not feasible. If you have a solid business plan for recovering your company’s profitability and paying off its debts, you might want to avoid a CVL.
Your intentions are made public
When beginning the CVL procedure, a notice of your upcoming liquidation must be posted in the Gazette. This is to ensure other relevant parties have the opportunity to contest the liquidation if they want to.
Although this isn’t necessarily a negative, it could harm the reputation of a liquidated company’s directors. The public will be aware of what is happening, and be able to tie it to your name. However, company liquidation is hardly an uncommon occurrence, especially in today’s economic climate. Liquidating a company is, therefore, unlikely to cause much of a stir.
Protections do not extend to personal guarantees
At the end of a CVL, unpayable company debts are written off. However, if a personal guarantee has been signed as part of a loan agreement, you will still be obligated to make repayments from your personal finances. If you can’t pay, your creditors are entitled to take the matter to the courts.
Investigation into director conduct
As part of the CVL procedure, liquidators are obligated to open an investigation into the conduct of company directors. This is typically just a formality, most often resulting in directors being cleared of intentionally shirking their duty to act in the company’s best interests. However, if the investigation finds that directors have purposefully influenced the company’s decline into insolvency, a formal investigation can be opened by the Insolvency Service.
For most directors, this investigation is merely a part of the CVL process.
Clarke Bell can help
If your company is struggling with its finances, let Clarke Bell help you.
We have more than 28 years of experience in helping companies find the best possible solutions to their debt problems, and we can do the same for you.
Our team of experts can guide you through the CVL procedure, or help you find other solutions, should a better option be available.
For a free, no-obligation consultation, contact us today and find out exactly what we can do for you.