Deciding to close a company is difficult, but in some cases, it might be your only option. If your business has been struggling financially and is insolvent, then a CVL could be the best choice. In this blog, we’re looking into the role of creditors and directors in a CVL.
What is an insolvent company?
An insolvent company is one that cannot afford to pay its debts when they fall due, or its liabilities may be worth more than its assets.
If you believe that your company is insolvent, it’s absolutely crucial that you seek professional advice. You will need to consider your options carefully and take action quickly.
Continuing to trade while insolvent could land you in a lot of trouble as a director and may even lead to compulsory liquidation. Compulsory liquidation begins with a winding up petition and opens the door to more director scrutiny for all aspects of wrongful trading.
In contrast, a solvent company can afford to pay debts when they fall due and its assets are worth more than its liabilities.
What is a creditor’s voluntary liquidation (CVL)?
A CVL is a shortening of a creditor’s voluntary liquidation. This is a common way for directors to close their companies. It generally reflects positively on them as they have voluntarily closed the company instead of continuing to trade. This shows them adhering to their director’s duties. Directors must still demonstrate that they have acted appropriately to reduce the risk of further issues.
In a CVL, the director’s conduct will be assessed by a licensed insolvency practitioner and the details will be sent to the Insolvency Service. The appointed insolvency practitioner will communicate with outstanding creditors and sell assets to try and repay them. In some creditor’s voluntary liquidations, the creditors are left unpaid.
Providing that no wrongdoing is found and no personal guarantees have been signed, any outstanding debts at the end of the liquidation can be written off. The company will also be removed from the Companies House register.
How to notify creditors of a voluntary liquidation
The notice of a creditor’s voluntary liquidation is usually prepared by the director and the licensed insolvency practitioner. The insolvency practitioner will be responsible for sending the letter and communicating further with the creditors. The following details should be included in the letter.
- Details of the appointed liquidator
- Contact details of the appointed liquidator
- Time and date of the creditor’s meeting
- Location of the meeting
- A statement of the company’s affairs & company’s financial position
The letter should be sent at least seven days before the date of the creditor’s meeting. The letter can be used to let creditors know how to make a claim and it must follow all legal requirements. At the same time as sending the letter, a notice should be published in a relevant publication, such as The Gazette.
What is the role of creditors in a CVL meeting?
Creditors play a significant role in a creditor’s voluntary liquidation meeting, as they help to review the company’s financial situation. They will liaise with the insolvency practitioner to assess how they can be paid from the remaining company assets.
Creditors can be labelled as secured and unsecured creditors, depending on whether they have security over the money owed.
Many creditor meetings are held over the phone to reduce business disruption for creditors. It should be held directly after the shareholder’s meeting has finished.
As a company creditor, you can ask the liquidator any questions you have, highlight issues you wish to be investigated, offer alternative nominations for the liquidator and form a liquidation committee.
A liquidation committee is a group of creditors who oversee the liquidation and ensure that everything is completed correctly and fairly. They are not always necessary, but some creditors may wish to form this group.
What happens to unsecured creditors during a CVL?
When it comes to being paid in a liquidation, there is a hierarchy of creditors. This means that some creditors are legally required to be paid first. Typically, unsecured creditors are the last to be paid in liquidation. These creditors often include suppliers and employees. Read our blog on who gets paid first in a liquidation.
In some cases, there will be money left over when the secured creditors have been paid. When this happens, the liquidator will distribute a dividend among the outstanding unsecured creditors, which will be a percentage of the claim. These unsecured creditors will need to submit evidence alongside their claim to be considered for the dividend payment.
There is a risk that some creditors will not receive any payment during the creditor’s voluntary liquidation process, and the outstanding company debts will be written off.
Can directors be held personally liable?
Generally speaking, in the UK, we have limited companies. These limited companies are separate legal entities to the directors. This means that the directors are not usually responsible for the company’s debts.
However, there are some instances where the directors can be personally liable for the company’s debts in a creditor’s voluntary liquidation. These include if any wrongdoing is found or if they have signed a personal guarantee.
Wrongdoing includes trading while insolvent, concealing company assets, inappropriately withdrawing money, paying certain creditors over others, fraudulent trading, not keeping accurate accounting records or taking dividends when the company is already insolvent. When this happens, it will be found out during the liquidation process. If you are worried about any of these things, it’s vital that you are honest with your insolvency practitioner.
A personal guarantee acts as a safety net for creditors as it means that you will repay the money owed if the company cannot do so.
Additionally, directors can be liable if they have an overdrawn director’s loan account. At the end of the accounting period, it’s vital that your director’s account is in credit or at zero.
If the company goes into liquidation, you will not be able to reclaim the money you previously sent to the company account. You will also not be able to send more money to the account to get it out of debt. This will be considered a preference payment and will not be taken lightly.
In most cases, directors who have acted responsibly and adhered to their duties should face no issues with personal liability.
Do directors receive redundancy pay?
Whether or not you can claim director redundancy pay depends entirely on your personal situation. There are some criteria that must be met in order to qualify for this payment.
- The director must have been registered as an employee within the company, and their salary must have been taken via PAYE
- They must have worked in the company for at least 16 hours per week
- They must have been a registered employee for at least two years
- The company must be insolvent and in formal liquidation proceedings
As an insolvent company director, you must meet all of these criteria to be eligible for director redundancy payments. Eligibility is also assessed on a case-by-case basis, so there is still no guarantee that directors will receive payment.
The effect of CVL on shareholders
Unfortunately, when a company enters a creditor’s voluntary liquidation, shareholders often receive minimal or no payment. The creditors must be paid in full before shareholders receive any payment, which doesn’t often happen.
We hope this blog has been helpful on the role of creditors and directors in a CVL. If you’re looking for advice on closing your limited company, please don’t hesitate to contact us.
It’s absolutely vital that you seek professional advice that’s tailored to your personal situation. Our friendly team will be more than happy to help.
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.
We are one of the only 5-star corporate insolvency companies on Trustpilot, with hundreds of 5-star reviews. Contact our friendly team for insolvency advice.