Creditors’ Voluntary Liquidation (CVL) Process – How Can it Help?
A Creditors’ Voluntary Liquidation is usually initiated by directors of a limited company, following a shareholder resolution. This process allows the directors time to get the limited company’s affairs in order, before closing and working within the board timelines.
We are addressing a creditors’ voluntary liquidation in an overview page as it is the most common and appropriate way to close an insolvent company within the UK.
Creditors’ Voluntary Liquidation Explained
A creditors’ voluntary liquidation (CVL) is a process designed to allow an insolvent company to close voluntarily. The decision to liquidate is made by a board resolution, but instigated by the director(s). If your limited company’s liabilities outweigh its assets, or the company cannot pay its bills when they fall due, then this solution could be the right choice. Either way, if you are considering voluntary liquidation then as the director you are likely to be under pressure to pay bills that your company is struggling with. Naturally, each creditor wants their bill paying first. So what happens if you cannot afford to pay them?
A limited company becomes insolvent when it can no longer pay its bills when due, or when its liabilities, including contingent liabilities such as redundancy payments, outweigh the company’s assets. This is a critical point in the lifespan of a company as it denotes when the directors’ responsibilities change from the shareholders to the creditors. It also means that the directors need to be extremely careful when considering whether to continue trading or not. Any director who knows that the company is insolvent yet makes the decision to continue trading, and in doing so increases the debts of the company, can be made liable for the company debts.
When Should You Consider a CVL?
There are a number of business scenarios where a creditors’ voluntary liquidation may be the only solution, or part of the solution. Here are a few examples:
- Historic debts may have accumulated but the core of the business may be viable;
- HMRC are chasing taxes owed and refusing to accept further time-to-pay arrangements;
- Your company is insolvent and no longer appears to be viable, even if restructured;
- There has been a decline in the market for your company’s services and products;
- The directors are not willing to provide further personal funding to keep the company afloat;
- You would like to use a creditors’ voluntary liquidation as part of the restructuring of a group.
After establishing that your company is insolvent, the inevitable next question is ‘Do I want to continue to trade or should I shut-up-shop?’. Either way, a creditors’ voluntary liquidation may well provide you with the ideal solution for your debt problems. Whilst liquidation should always be considered as the last resort, if managed carefully it can provide a chance for a new beginning.
A limited company is a legal entity in its own right and so the debts belong to the company. Therefore, a CVL allows you to liquidate the company and in doing so, the company debts are liquidated along with the company itself. There are exceptions to this rule, such as debts that are personally guaranteed. This is due to the limited liability status of your company and you should be wary of closing the company simply to avoid paying creditors, as a creditors’ voluntary liquidation should only be seen as a last resort.
The fact that the debts belong to the limited company as a legal entity in its own right means that the directors can start a new limited company and their personal credit rating should not be affected.
If you are considering voluntary creditors’ liquidation as an option please contact us immediately, as without guidance this route can be similar to making your way through a legal minefield. It can be difficult to know who to trust online, so if you would like to speak with other clients that we have helped please just ask, or you can read our testimonials page.
The directors may call a meeting to pass a resolution by the shareholders following a declaration of insolvency. Once the ‘winding up resolution’ has been passed by at least 75% of the shareholders, the insolvency practitioner (liquidator) can then be engaged. The liquidator, once authorised to act for the limited company, acts in the interests of the creditors and shareholders, but usually in the majority of cases there is little remaining for shareholder distribution. The liquidator is an insolvency practitioner who must hold the appropriate licences, but they do not actually take control of the limited company’s affairs until the appointment is authorised, following approval (from creditors) at the creditors meeting.
The Company’s Statement of Affairs
The liquidator (appointed insolvency practitioner) acts on behalf of the creditors so must have an accurate understanding of the limited company’s financial affairs. So, inevitably the first matter to be addressed in a creditors’ voluntary liquidation will be the collection of the statement of affairs for the limited company. In effect, this means that the director is providing an accurate record of the company’s affairs for the liquidator, which will include; list of creditors, assets, liabilities (including contingent liabilities) and debtors to the limited company. A contingent liability (potential future liability, such as a court order for example) must be taken into consideration when calculating whether the limited company is insolvent, or not; so this should not be overlooked. A trading statement, typically, will also be provided by the director which outlines a brief history of the limited company and when things started to go wrong. It is important to have accurate and up-to-date creditor information such as the postal address and reference details, as each creditor must be written to and they will be asked for proof of the debt.
The affairs must provide an accurate picture of the limited company’s financial affairs as the director may be held accountable if there are deliberate omissions. Any misrepresentation of the information provided may be considered a ‘material irregularity’, so the information provided to liquidators should be checked carefully by the directors before handing it across. It is also worth understanding that the director will be required, at some point before the creditors’ meeting, to sign the statement of affairs as a sworn document.
The Creditors’ Meeting
The creditors’ meeting (Section 98 of the insolvency Act 1986) must be held within 14 days of the shareholders’ meeting to wind up the company, but in the majority of cases this will be signed on the same day of the liquidation. So, professional insolvency advice should be sought prior to any resolution being made. Creditors will be written to and, in part, invited to vote on the appointment of the insolvency practitioner as ‘liquidator’ at the meeting, or by proxy vote; by post. The votes from the creditors are in direct proportion to the value of the debt held by the creditors. At least one active director must attend the creditors’ meeting and technically, they are responsible for ‘chairing’ the meeting; but this would normally be managed by the liquidator.
A key part of the liquidator’s role is to determine what assets should go where, and the correct sequence for doing so, as prescribed by law. A key proposal from the government affected the distribution to creditors and the changes were made in the Business Enterprise Act which came into effect on the 15th September 2003. The first major change was to remove the Crown’s right to preference, which they had up until that time, which meant that they simply became an unsecured creditor. The government, however, also made another change that meant banks could only take a portion of what was secured under a debenture (fixed/floating charge on company assets). The fear was that without this legislative change, the banks would simply have taken everything else, as was their right, if secured using a debenture over the company assets. In effect, the government ring-fenced a portion of the available cash derived from the assets that the banks could not touch and this portion was called the ‘prescribed part’.
Generally payments are prioritised as follows:
- Liquidator fees and costs – Except if a creditor has a fixed charge as the liquidator would have to agree fees with them. There is a prescribed part and fees can be taken from the part assigned to floating charge creditors;
- Secured creditors with a fixed charge – subject to the prescribed part;
- Employees’ holiday pay/wages – Are classed as preferential – if they are paid via redundancy payments fund then the Department of Employment becomes a secured creditor. If there is a shortfall – in those cases where someone earns in excess of the government limit then they can claim preferentially too;
- Creditors – where there is a floating charge on company assets;
- Unsecured creditors – general unsecured creditors of the limited company.
The actual meeting must be convenient for the creditors attending and they will be provided with a copy of the sworn statement of affairs and can have access to the list of creditors too (not more than 14 days before the date of the meeting). It is unusual in the majority of cases for creditors to attend but when they do they can ask questions of the director. Creditors can object to your proposed liquidator and if they have gathered more than 40% of the voting rights they can appoint a liquidator of their own choosing. It is also possible, and not unusual, to have more than one liquidator where objections may have been raised, or due to the complexity of the case.
Under insolvency law (IA 2000) and the Company Directors Disqualification Act 1986 (CDDA) the liquidator must provide a report on the company directors’ ability to manage a limited company amongst other matters. The investigation can lead to a disqualification for between 2-15 years so the step to engage a liquidator should not be taken lightly and without speaking to past clients. The relevance to the director is that the liquidator has a duty to investigate the director and in particular key events that have taken place in the previous twelve months, or so.
Typical actions and events investigated by the appointed liquidator will be:
- Movements of limited company assets from the balance sheets;
- Money repaid to directors in preference to other creditors;
- Creditors paid where there may be an incentive for the directors’ benefit;
- Assets sold at an undervalue;
- Directors loans from the limited company;
- Legal action taken by creditors.
The limited company will inevitably be insolvent which means it cannot pay its bills when they are due, called the ‘cash-flow’ test, or the company liabilities outweigh the company assets, called the balance sheet test. Of the two tests it is generally accepted the most important is the ability to pay its bills, when due. When the limited company becomes insolvent the directors’ responsibilities change in as much as in the normal course of events the responsibility is to the company itself and the shareholders. Once the company is deemed insolvent the directors’ responsibilities are to the creditors. This is a key point in law as any actions by the director can be investigated by the liquidator particularly where assets have been transferred out of the limited company at an ‘undervalue’, or money has been taken from the company by and for a director’s benefit.
“What is the difference between a CVL and a Winding Up Petition?”
The key difference between a compulsory liquidation and a creditor voluntary liquidation is that the former is a process involving a court and judge. A creditors’ voluntary liquidation does not involve an appearance at court sitting before a judge. Depending on the amount owed and whether HMRC are involved the court appearance may be at the High Courts of Justice. An angry creditor will typically have petitioned (applied) the court to have the company ‘wound up’ by way of a compulsory liquidation. All interested parties can have their say and clearly the petitioning creditor will attend usually with a lawyer and or barrister.
Assuming the petition is granted the company is wound up and the official receiver is notified. The official receiver is a civil servant and works for the government and you will be ‘invited to attend an interview’ which you must attend.
The CVL will typically be held at a convenient meeting place geographically smart for the majority of creditors where a room is booked for the creditors meeting. Whilst this is a statutory process it is not as formal as a court process and does not have a judge sitting. Creditors are invited to attend the creditors meeting by the liquidator (to be) but they do not always attend where there is little chance of a return. The meeting technically is supposed to be ‘ran’ by the chairman (director) but in practice it is the liquidator (to be) who will answer questions if any and generally director the meeting. The liquidation itself will have been instigated by the director not the creditors despite the name of the liquidation so affords more control over the timing.
Life After a Creditors’ Voluntary Liquidation?
With a CVL the directors can close the limited company without the permission of the creditors and most directors who are forced to consider this option will, in hindsight, tell you that this allowed them to take back control of the company’s destiny. Although the decision to liquidate the limited company is never an easy one to make, it is better being made by the directors and shareholders than having the decision forced upon them.
Contact Us for CVL Advice
Prefer to talk? To speak with one of the team about a creditors’ voluntary liquidation and how it could possibly solve your situation call us on 08000 746 757; or use the Live Support feature at the bottom-right of this page.
Written by: Mike Smith