It can be a difficult decision to liquidate your company, but sometimes, it is the only option available to directors. In this blog, we’ll let you know about preparing for creditors’ voluntary liquidation.
Liquidation is available to limited liability companies. This is a company that is a separate legal entity from its directors.
What is a Creditors’ Voluntary Liquidation?
A Creditors’ Voluntary Liquidation (CVL) is a formal insolvency procedure that insolvent companies use. Insolvent companies are those that cannot afford to pay their debts when they fall due and their liabilities are worth more than their assets.
According to UK Government data, CVLs are the most common method used by insolvent companies, with around 80-85% of companies using them. Unfortunately, the number of companies becoming insolvent has risen since the pandemic as companies struggled to get their finances back on track.
Why are CVLs so common?
A CVL is the best option for insolvent companies whose directors have acted responsibly. Find out more about director responsibilities in the UK. These are outlined in the Companies Act 2006.
The outcome of a CVL is positive for directors, as money is generated from sold assets to pay off the company’s creditors. In some cases, some creditors may receive no money. An insolvency practitioner handles the entire process of a CVL. They will deal with the sale of company assets (asset realisation) and communicate with your creditors.
How does a Creditors’ Voluntary Liquidation differ from other liquidation methods?
A CVL is the best option for you to choose if you have debts you cannot afford to pay on time. This insolvent liquidation method will reflect positively on you as a director and means that you will have more control over the process and be able to choose your own licensed insolvency practitioner.
In contrast, a compulsory liquidation will reflect negatively on you as a director, as it is forced upon the company’s directors by their creditors. The creditors will order a winding-up petition, and if you do not pay the debts off by a specified date, your company will be wound up. This means it will be closed and removed from the Companies House register. Compulsory liquidation could indicate that you have not adhered to your director’s duties, putting you at an increased risk of scrutiny.
A member’s voluntary liquidation can only be used by solvent companies. It requires a licensed insolvency practitioner and is often a more tax-efficient way to close a company if you are eligible to use it.
What are the financial implications of a Creditors’ Voluntary Liquidation?
There should be no financial implications for directors who have not committed wrongdoing and have no personal guarantees. However, for directors who have committed misconduct, you will find yourself dealing with the consequences. These may include personal liability for company debts, fines, director disqualification or even prison sentences.
Do not bury your head in the sand, hoping that wrongdoing will not be discovered, as it will be.
Signs your business might need to use a voluntary liquidation process
If you’re not familiar with insolvency proceedings, then it can be tricky to spot the signs. Here are some of the most common signs that you might need to use a CVL procedure.
Frequent cash flow issues
If your company is consistently struggling for money, then it can be a sign that something isn’t quite working as it should be. You should closely monitor your cash flow. You also need to continue filing your accounts when they are due. Businesses should use balance sheets and keep accurate profit and loss accounts.
Creditor pressure
Creditor pressure can be extremely difficult to deal with. It might involve persistent phone calls, emails, letters and even bailiff action. Some creditors may even threaten legal action, which you need to be wary of. This could be the beginning of a compulsory liquidation.
We recommend being honest with your creditors if you cannot pay them. They are more likely to be understanding if you are transparent. If you know that you will have the money to pay them soon, you could let them know and say you’ll check in again in a few weeks.
HMRC can apply creditor pressure, but they will be more understanding if you explain your situation over the phone. Depending on your actions and how much money you owe, they may also offer you a time-to-pay arrangement.
Generally, if a company cannot afford to pay its debts when they fall due or its liabilities are worth more than its assets, it is insolvent. To achieve the best possible outcome, it should seek professional advice as soon as possible.
How to prepare for a Creditors’ Voluntary Liquidation process
Assess your financial position
Before you enter liquidation proceedings, you need to understand your financial position well. Ensure that you have thoroughly reviewed your company accounts. Then, make a list of your assets, liabilities, and any outstanding debts.
Before you agree to enter into a CVL, you need to check whether or not you have an overdrawn director’s loan account or have signed any personal guarantees. If these are found afterwards, it’s likely that you will become personally liable to pay back these debts.
Seek professional advice
You will need to appoint a licensed insolvency practitioner to complete the liquidation process. Make sure you speak to a few different people before you make a decision. You also need to ensure that you get all costs in writing and that they have checked for an overdrawn loan account, personal guarantees and any wrongdoing.
As we mentioned earlier, the insolvency practitioner will take care of all aspects of the CVL.
Communicate with stakeholders
It’s vital that you inform the company’s stakeholders of your proposed decision. This helps keep things civil and ensures that everyone has a better understanding of the situation. This meeting, which may also be referred to as a shareholders meeting, allows you to prepare for the creditor’s meeting.
At this point, you should also gather important information such as statements, creditor lists, asset inventories, and information relating to the company’s contractual obligations.
Plan for employees
It’s crucial that you act within your legal duties when informing employees about your plans to close the company. You will need to provide guidance on redundancy rights and how to claim statutory redundancy pay.
Creditor’s meeting
The creditor’s meeting will take place when the liquidation process begins, but it’s good to be prepared for it. You will need to create a statement of affairs and explain the process to company creditors. Part of this may involve addressing their concerns.
It’s vital that you avoid any wrongful trading or director misconduct during this time. You should also handle the process with professionalism at all times.
What happens after liquidation?
During the liquidation, the company assets will be sold in order to generate money for your creditors. The insolvency practitioner is also legally required to prepare a report to send to the Insolvency Service. This will include information relating to your director’s conduct. Find out more about a director’s conduct report.
If you have acted responsibly as a director, then any outstanding company debts will be written off, and the company will be closed and removed from the Companies House register.
Things to avoid when preparing for a Creditors’ Voluntary Liquidation
- Not getting advice – make sure you get professional advice as soon as possible
- Not keeping correct financial records for your limited company
- Not being able to provide documentation when it is requested regarding your financial situation
- Not communicating professionally with creditors
Benefits of being prepared for a Creditors’ Voluntary Liquidation (CVL)
- A smoother liquidation process with minimal issues
- Better protection for the company’s directors
- Maintain better relationships with company creditors and stakeholders
It is important to be prepared for your creditors’ voluntary liquidation, and we can offer advice to help you do so.
Do you need to close your company through a CVL procedure? Contact our friendly team today for confidential, honest advice.
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