Company directors must think very carefully before they decide to enter a liquidation procedure. In this blog, we’re looking at the financial and legal implications of a CVL.
Although you must think carefully about your liquidation decision, you must also act quickly. Otherwise, you risk being accused of not adhering to your director’s duties. You also risk the company being forced into compulsory liquidation, which will not reflect positively on you as the director.
What is a CVL?
A CVL is a shortening of a ‘Creditors’ Voluntary Liquidation’. This is a formal liquidation process used by insolvent companies and mostly reflects positively on directors as they are adhering to their duties. It is used by limited companies, which are a separate legal entity from directors.
Insolvent companies are those whose liabilities are worth more than their assets or they cannot afford to pay their debts when they fall due. Insolvent companies must act quickly and seek professional advice to increase the chances of a positive outcome.
All liquidation procedures require the appointment of a licensed insolvency practitioner. They will take care of all aspects of the (CVL) creditor’s voluntary liquidation process, including assessing the company’s financial situation, creditor communication, collecting documentation and closing the company. A CVL process can give companies experiencing financial difficulties some breathing space from creditor pressure.
The CVL process ends with the company being closed and taken off the Companies House register.
What is the outcome of a creditor’s voluntary liquidation (CVL)?
The outcome of a CVL depends on the actions of the director. Ideally, company directors would not have overdrawn directors’ loan accounts, and they would not have signed any personal guarantees. Before you enter the liquidation procedure, you need to ensure that a licensed insolvency practitioner has checked these elements.
A director who has not committed any wrongdoing, hasn’t signed any personal guarantees and does not have an overdrawn director’s loan account should not experience any issues.
In contrast, company directors who have committed wrongdoing will face the consequences. Directors can face consequences, such as fines and personal liability. More serious consequences include director disqualification and even prison sentences.
You will also experience personal liability if you have an overdrawn directors’ loan account or you have signed a personal guarantee.
It’s so important that you are honest with your appointed insolvency practitioner. The truth will come out during the process, so you need to be honest. It is the licensed insolvency practitioner’s role to assess your director’s conduct for the three years leading up to the insolvency. This information is sent off to the Insolvency Service.
What are the financial implications of a CVL?
There are many implications for companies, directors, employees, outstanding creditors and shareholders. You should be aware of these before you make a decision.
Company assets
Every company has assets, such as stock, machinery, or even money in the bank. If your company is insolvent, you may be struggling financially, which means you may not have money in the bank. In liquidation, these assets will be sold or ‘realised’ to make money to pay back company creditors.
It’s so important that you are careful if you decide to sell company assets before liquidating. Many directors make the mistake of selling assets undervalue, which can land you in trouble. If you do sell assets before liquidation, make sure you use an independent valuation company, sell the assets at market value and ensure that you keep all documentation.
Company debts
If you’re entering a creditor’s voluntary liquidation, you likely have company debts. Providing that you have committed no wrongdoing, have no personal guarantees and do not have an overdrawn loan account, the company debts will be written off.
Assets will be sold to repay creditors, and any remaining creditors may not receive payment. Read our blog on who gets paid first in liquidation.
Personal guarantees
In a CVL, any personal guarantees will not be written off. Directors are required to settle these themselves, which means they become a personal liability.
Directors may be tempted to pay off these debts using company funds before the liquidation procedure, but this will land you in a lot of trouble. This is known as a preference payment and means you’re paying someone off who is not next in line for payment. Make sure you tell the licensed insolvency practitioner if you have an overdrawn account or have signed a personal guarantee.
What are the legal implications of a CVL?
Company closure
Following a successful company closure, the business will be taken off the Companies House register, and the debts will be written off. This means the company will cease to exist. If wrongdoing is found, the company may be reinstated so it can be held liable. This will be by court order and is known as ‘restoration by court order.’ Creditors will be referred to as unsecured and secured creditors.
Director’s conduct
Before a company is successfully closed, the director’s conduct will be assessed. The insolvency practitioner will assess your conduct, looking for any wrongdoing or any action that may have caused the company’s financial struggles.
Directors who leave their company struggling and are forced into compulsory liquidation will face increased director scrutiny compared to those who take action and enter a CVL.
Director liability
As we mentioned previously, at the end of the liquidation process, directors will be made aware of any liability they have for company debts. Additionally, wrongdoing can lead to director disqualification.
Poor director conduct and personal liability can also negatively impact the director’s reputation. This means that many creditors would not want to work with the director again if they were to open another company.
Employee implications
Companies closing can be stressful for employees. It’s important to be honest with your employees and guide them on how to claim statutory redundancy pay.
Creditor’s voluntary liquidation (CVL) advantages
There are many advantages of using a creditor’s voluntary liquidation. However, the exact outcome depends on your personal circumstances.
- Outstanding debts are written off (in most cases)
- Any legal action against the limited company is stopped
- Limited company leases can be cancelled
- Avoid further issues for the company – such as poor director conduct and compulsory liquidation
- Employees can access statutory redundancy pay
- Provides peace of mind that correct actions are being taken
All of these advantages are only possible if you select a high-quality insolvency practitioner. You should only choose from licensed professionals.
You also need to ensure that you get all costs in writing and that they have checked for personal guarantees and overdrawn loan accounts before you begin the formal insolvency process. Finding these out later down the line can cause many issues for you and leave you needing to pay a lot more money.
Creditor’s voluntary liquidation (CVL) disadvantages
There are very few disadvantages of a CVL, providing that you have acted responsibly as a director. Those who have not acted responsibly may experience more of these disadvantages.
- You may experience personal liability for company debts
- You may be accused of wrongful trading and misconduct
- Business assets will be sold
- You will lose staff – again, employees are likely to experience better outcomes with a CVL than with a compulsory liquidation
Do not leave wrongdoing and misconduct hidden, as they will be uncovered throughout the process. You will experience a much better outcome if you are honest about your actions than if you bury your head in the sand and pretend everything is fine.
We hope this blog has been helpful regarding the financial and legal implications of a CVL. At 1st Business Rescue, we are on hand to help with all aspects of liquidation and can provide honest, confidential advice to directors. Don’t wait any longer to get personalised support on how to enter voluntary liquidation. Contact us today.
Justin Barker
I’m Justin Barker, the Managing Director at 1st Business Rescue. I have over 25 years of experience providing insolvency advice to business owners.
I understand how challenging it can be when dealing with financial difficulties within your business. It’s easy to ignore the problem and hope that it disappears, but this is often the worst thing you can do. Our dedicated team is here to provide honest, valuable advice to help UK directors deal with their personal situations in the most appropriate way.
No case or circumstance is the same, but I can guarantee that I am there to give you the best advice.
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