Please explain the Advantages and Disadvantages of a Creditors’ Voluntary Liquidation?
Putting a company into a Creditors’ Voluntary Liquidation (CVL) is not a decision to be taken lightly. As the name suggests, a CVL is a liquidation process that will end in the dissolution of your company. That said, a Creditors Voluntary Liquidation can also be seen as a way of taking control of an impossible situation – managing an insolvent company can be a stressful and demoralising experience.
If your company is insolvent, you may be unsure whether a Creditors’ Voluntary Liquidation is the right choice, so here’s a summary of the advantages and disadvantages of a Creditors’ Voluntary Liquidation.
Control over Timings
The decision to commence a Creditors’ Voluntary Liquidation must be made via a resolution of the board of directors, then ratified by a resolution of the shareholders. This means that as the director of the company being put into liquidation, you will have control over the timing of when the liquidation process commences. Control over the timing means more time to prepare the company for the liquidation. This is a distinct advantage when compared with compulsory liquidation, where the company’s creditors force the company into liquidation, and the directors have no control over timing.
Directors Can Know What to Expect
A Creditors’ Voluntary Liquidation is a statutory process, so each step is pre-defined. This means that as a director, you can know what to expect as you move through the liquidation process.
Liquidator Deals with Creditors
Once the liquidator has been appointed, the company’s creditors will need to communicate with them and not with you as a director. This can be a huge relief in situations where you are receiving threatening calls and letters on a frequent basis from creditors demanding to be paid because the company is insolvent and the company can’t pay its outstanding debts. The liquidator also has to pay the creditors in a predetermined order of priority, so there is very little room for creditors to claim they have not received their allotted share of the liquidation proceeds.
Stops Legal Action
Unpaid creditors will often threaten (and pursue) legal action against a company for unpaid debts. They may also force the company into compulsory liquidation where they are owed more than £750. Once a company has entered into a Creditors’ Voluntary Liquidation, creditors cannot take legal action against it and won’t be able to force it into compulsory liquidation.
Company Will be Closed
A Creditors’ Voluntary Liquidation is a procedure which will end with the company’s assets having been sold off and the company itself wound up. This cannot be undone. You will not be able to start a company with the same name unless you seek advice and follow a prescribed process. Unless you do this, if you decide to start another company in the same field, any goodwill that has been built up in the company’s brand name will be lost.
It’s a Public Process
It’s a requirement of a CVL that the creditors’ meeting has to be advertised in The Gazette, which means it is publicly reported and is on the public record. There’s no way to avoid this requirement.
Investigation into Conduct of Directors
The liquidator is required to conduct an investigation into the conduct of the directors for the period leading up to the company’s insolvency. They will look at whether the directors discharged their duties and if there has been any director misconduct. This investigation is a serious matter, particularly because any director found guilty of misconduct can be barred from acting as a director for up to 15 years.
No Returns for Shareholders
As the company is insolvent, it’s highly unlikely that there will be any returns for the company’s shareholders from the liquidation. Any proceeds realised from the liquidation are likely to be swallowed up paying the liquidator and the creditors.