What is a Creditors’ Voluntary Liquidation (CVL) and How Could it Help the Business?
A creditors’ voluntary liquidation is a type of liquidation that is initiated by the directors of a limited company, following a shareholder resolution. This type of voluntary liquidation 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 CVL may be the only solution, or part of the solution. Here a small number:
- 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.
Consequences of a CVL
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 voluntary creditors’ 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.
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