A Creditors Voluntary Liquidation (CVL) is a process allowing the directors of a limited company, after a shareholders vote, to voluntarily close the company via liquidation.
It is routinely chosen by directors as a preferable alternative to being forced into a compulsory liquidation process via a winding up petition.
The Creditors’ Voluntary Liquidation process must be carried out by a licensed insolvency practitioner.
Once the insolvent company has been liquidated the debts are wiped out along with the limited company itself.
What is a Creditors Voluntary Liquidation ?
Creditors voluntary liquidation, is when a company’s own shareholders vote to wind it up. Once directors have concluded that the logical decision is to close down the company, a 75% majority of shareholders is required to instigate the process.
With almost all CVL situations, the company has reached the point where it will either about to be forced into compulsory liquidation by creditors, or the directors recognise the company is insolvent and has no future.
While protecting the company from compulsory winding up, the choice to liquidate places the company in the hands of an insolvency practitioner (IP). The IP will close down the company and sell any assets to seek the best return for company creditors, in order of priority.
At that point, choosing liquidation means you’re taking steps to close the company via the formal legal procedure, you’re going to bring in professional help, and you’re going to get creditor pressure off your back.
Once the Insolvency Practitioner (IP) has taken over, your role as director will cease, though you will be requested to provide certain pieces of information to the IP as the process unfolds.
What’s the Cost of a CVL?
Some company directors, aware of the businesses situation, delay putting their company into creditors’ voluntary liquidation for fear of not being able to pay for it. The important point to remember is that, assuming there are some company assets, any costs are taken from the liquidation itself.
The only time directors would have to pay for the liquidation out of their own pockets is where the company assets fall below the basic cost of the liquidation, which is about £5000 + VAT. Obviously, this will vary depending on the complexity of the case.
Creditors Voluntary Liquidation Process
Below is the process for conducting a Creditors’ Voluntary Liquidation.
(1) Appointing an Insolvency Practitioner (Liquidator)
Once you have discussed the possible liquidation with an insolvency expert to make sure it is the right decision for you, the next step is to appoint a liquidator. In a Creditors’ Voluntary Liquidation, the shareholders will appoint and pay for an authorised insolvency practitioner to act as the liquidator.
The liquidators appointment will then need to approved by the creditors at the creditors’ meeting.
This usually takes place three weeks after the initial engagement.
(2) The Meeting of Directors
The directors must hold a meeting to confirm that the company is insolvent and that steps are being taken to place the company into a CVL.
A meeting of the company directors can be called straight away. This process can take place particularly quickly if it’s a small company with only a handful of directors.
(3) Consent to Short Notice
If 90 percent of the company’s shareholders sign a ‘Consent to Short Notice’, the shareholders’ meeting can be called and held immediately.
If the shareholders do not agree, a notice period of 14 days will need to be given before the shareholders’ meeting can be held.
(4) The Shareholders’ Meeting
The shareholders’ meeting will normally take place immediately before the creditors’ meeting. If the shareholders agree to the liquidation, they can then confirm the directors’ choice of the liquidator.
(5) The Creditors’ Meeting
After the shareholders’ meeting, there must be a creditors’ meeting, which is often held on the same day.
Creditors must receive a statutory minimum of 7 days notice of the meeting, although within 14 days is considered to be better practice. Often creditors will receive 3-4 weeks’ notice.
(6) Company’s Assets are Liquidated
At this point, the liquidation of the company can go ahead. From start to finish the time it takes to complete the CV sale of assets can vary dramatically depending on the complexity of the case.
However, in the vast majority of cases (around 80 percent), we would expect the process to take between 2-3 months. In more complex cases it can take as long as 12-24 months.
What is the Benefit of a CVL Rather than Compulsory Liquidation?
Here we outline the advantages and disadvantages of a Creditors’ Voluntary Liquidation process.
- Directors benefit from more control than a compulsory process
- Less risk of wrongful trading
- Creditor pressure is instantly removed
- Directors have the possibility to buy back assets
How Long Does A Creditors Voluntary Liquidation Take?
A CVL can be a fairly fast-paced procedure especially where the initial stages of shareholder agreement are fast tracked as described above.
We find that some directors worry about how hostile creditors will react and that they may even try to stop the cvl and proceed with compulsory liquidation. For this reason, many company directors, want to get on with the cvl as quickly as possible. The creditors cannot stop the cvl although they can object to the choice of liquidator at the creditors meeting. In most cases this does not happen, often due to overall apathy of the majority of creditors.
Once the formal process begins (step 6 above), the time to liquidate will vary depending on the complexity and other factors. In a straightforward situation, it might take 3 months, in a very complex liquidation, with many debts or debtors or lots of assets, 6-9 months would typically be the trimeframe.
Creditors Rights in a CVL Process
The creditors are entitled to see a list of all creditors of the company and to view a summary of the Statement of Affairs at the Meeting of Creditors. They are asked to vote to approve the Liquidator and can even create a committee to control liquidation costs
Creditors are paid by order of priority from the sale of the company assets.
Registered creditors will be invited to a Meeting of Creditors and notified at least 7 days before the meeting takes place. The meeting will be online unless specific circumstances require a physical meeting.. At the Meeting of Creditors they can:
- Vote on the appointment of the liquidator
- Ask questions of the liquidating company director/s
- View a sworn Statement of Affairs [A list of the company assets and liabilities]
- View a history of the liquidating company up to its liquidation
- View a summary of all claims of all creditors
Creditors who do not want to attend can vote by Proxy on the liquidators’ appointment. A report of what happened at the Meeting of Creditors will be sent within 28 days of the meeting taken place
What Happens to Directors in a Creditors Voluntary Liquidation?
After a liquidator has been appointed, the director’s conduct in the period leading up to the insolvency will be under scrutiny.
If the director did not act in the best interests of creditors, or behaved in a manner not strictly legal, he may face accusations of wrongful trading, and there is the potential to be held personally liable for part or all of the company debts.
If you’re a company director, we can also advise you on where liquidation would bring with it director’s redundancy payment.
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