Where to begin

A Creditors’ Voluntary Liquidation (or CVL) is undertaken by a business when they have reached the point of insolvency and need to liquidate. It is a voluntary process that can be entered into when the directors are in agreement that the business is insolvent and needs to cease trading. It can occur in advance of being forced into liquidation by others, such as when creditors issue a winding-up petition. All the business’ assets will be realised, and the money accrued will be used to repay the company’s debts.

Below, we’ve listed some of the most frequently asked questions about a CVL.

What is a CVL?

A Creditors’ Voluntary Liquidation, or CVL, is a way for the directors and shareholders of a limited company to formally close the doors of their insolvent business. A company is facing insolvency when there is mounting pressure from creditors to repay debts, and the cash flow does not support it. As a voluntary process, it can be entered into before the company is mandated to liquidate by external parties and, therefore, offers a little more control to those involved in the business. It will require a third-party insolvency practitioner’s involvement to ensure the process is followed correctly, the company closes legally, and funds are appropriately distributed.

How will a CVL work?

The directors of the business facing insolvency must be in agreement that they want the company to liquidate. Once agreed, they will need to speak with an expert adviser such as 1st Business Rescue who will be able to appoint an insolvency practitioner to follow the process. It is advisable to do this sooner rather than later in order to avoid any accusations of misconduct or wrongful trading. The company will cease trading, and all assets will be ‘realised’ (i.e., sold off for cash). Any funds remaining within the business, or generated via the assets, will be used to repay creditors a proportionate amount. Investigations will be conducted as part of the process, including examining the directors’ conduct throughout to ensure they acted with integrity at all times, and in the best interests of the creditors. Once the CVL has been completed, the company will no longer exist, and if any debts are outstanding, they will be dissolved at that point.

Do the shareholders have to agree to a CVL in order for it to go ahead?

The directors must agree to liquidate the company, and 75% of the shareholders must also be in agreement before the CVL can proceed. It is commonplace for a meeting with the shareholders to take place, and it is at that point when their consent will be given. If it is below a 75% rate of agreement, the CVL cannot proceed.

How does a CVL affect directors?

The ceasing of trading and entering into a CVL will relieve the pressure from creditors about repaying the debts owed to them, which can significantly benefit the directors. If the business employs you as a director, the business’s closure effectively ends your employment. You will no longer receive any salary or benefits but should be eligible for government redundancy payments via the National Insurance Funds. In terms of your personal credit rating, the company’s limited liability will mean that you are protected from being personally responsible for company debts, unless you have signed any personal guarantees for them. Providing there has been no trading misconduct, and there has been no borrowing from a Director’s Loan Account or personal guarantees signed, the director will be protected from financial repercussions. If wrongdoing is uncovered and proven, the situation is different. It can result in disqualification from holding a directorship (for up to 15 years) and can mean that the director becomes personally liable for company debts. Directors must act in the creditors’ best interests at all times and appoint an insolvency practitioner at the earliest opportunity in order to avoid any such issues.

How does a CVL affect employees?

In the same way as employed directors, when an insolvent business ceases trading, the employment of the staff ends too. If there are no sufficient assets within the business to pay for redundancies, the employees can again apply via the National Insurance Fund provided they meet the criteria laid out.

What are the benefits of opting for a CVL?

  • As a voluntary process, directors have more control over the liquidation of the business and can have a say in choosing their insolvency practitioner
  • An insolvency practitioner is appointed early in the process, mitigating the risk of any trading misconduct which could have severe ramifications for the directors, including becoming personally liable for the company’s debts
  • All creditor claims can be submitted in a thorough and organised way and will be dealt with accordingly and fairly
  • Directors and employees can be eligible for redundancy payments
  • Any legal action which has been launched by creditors is paused whilst the CVL is ongoing, and no action can be taken against you
  • Once the company has been formally closed, any debts which have not been repaid as part of the process will be dissolved

Can I set up again after a CVL?

Providing you have not been disqualified as a director, you will be able to set up another business if you so desire. You will even be able to operate it in the same field as your previous company. However, there are likely to be some restrictions on using the same company name and this will need looking into from a legal standpoint.

Next steps

If you believe your business is facing insolvency, it is essential to appoint the services of an insolvency practitioner such as 1st Business Rescue in order to mitigate the risk of any issues occurring. You might also find there is an alternative solution to closing the doors on your business altogether. So, get in touch and we will be happy to answer any of your questions.

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