What are the Advantages and Disadvantages of a Creditors’ Voluntary Liquidation?

Is a Creditors’ Voluntary Liquidation right for my business?

Choosing to put a company into Creditors’ Voluntary Liquidation (CVL) needs careful thinking because it leads to the company being closed down for good.

On the plus side, an advantage of going for a CVL is that it can be a way to take control of a situation where the company can’t pay its debts. This advantage allows directors to manage a difficult situation decisively.

However, the disadvantages include closing the company permanently, meaning job losses and other potential financial consequences. These disadvantages highlight the need to carefully consider the decision, taking into account both the immediate relief it might bring and the long-term impact of ending the company.

Advantages of a Creditors’ Voluntary Liquidation (CVL)

Control over Timings

Creditors’ Voluntary Liquidation allows the directors of a limited company control over the timing of when the liquidation process commences. This is a distinct advantage compared to compulsory liquidation, where the company’s creditors force the company into liquidation, and the directors have no control.

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.

Choose a Liquidator

Directors have the advantage of choosing their liquidators in a CVL. This choice allows them to select an insolvency practitioner with whom they feel comfortable working, and who they believe will manage the liquidation process efficiently and sympathetically, considering the best interests of all parties involved.

Unsecured Debts Are Written Off

One of the significant benefits of a CVL is the ability to write off unsecured debts. Once the liquidation process is completed, most unsecured debts are written off, meaning that the directors are no longer under the pressure of these debts. This can significantly alleviate financial stress and allow for a new beginning.

Leases Can Be Cancelled

A CVL provides an opportunity to cancel or renegotiate onerous leases, whether they are property or equipment leases. This can be a crucial step in reducing the company’s liabilities and allowing for a more efficient liquidation process or business restructuring.

Liquidator Deals with Creditors

Once the liquidator (licensed insolvency practitioner) has been appointed, the company’s creditors will 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.

Potential for an Orderly Shutdown

A CVL allows for an orderly shutdown of the company’s operations. An orderly shutdown minimises disruptions to employees, suppliers, and customers, providing a clear timeline for the cessation of operations and the settlement of outstanding obligations.

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.

Mitigation of Directors’ Liability

Initiating a CVL proactively is a clear indication that the directors are taking responsible steps to address the company’s financial distress. By choosing to liquidate voluntarily, directors demonstrate their commitment to dealing with the company’s debts in an orderly and fair manner. This responsible action can protect directors from legal actions that might arise if the company were to continue trading while insolvent.

Preservation of Business Value

Entering into a CVL can help preserve the residual value of the business and its assets. By choosing to liquidate voluntarily at an earlier stage of financial distress, directors might maximise the value obtained from the sale of assets, benefitting creditors and potentially leaving a surplus for shareholders. This contrasts with a fire sale of assets in a compulsory liquidation scenario, where asset values might be significantly lower.

Provides a Clean Slate

For directors looking to move on and start new ventures, a CVL provides a formal closure to the existing company’s obligations and legal entity. This clean slate is essential for directors aiming to rebuild or pursue other business interests without the overhang of past business failures, enabling a fresh start with new ventures or opportunities.

Continue to Trade Through a Different Company and Purchase Assets Back

A CVL can provide a fresh start by enabling the directors to continue trading through a new company. This process often involves the new company purchasing the assets of the old company via a pre pack. It allows for business continuity while shedding the debts and obligations that burdened the original company, offering a pathway to preserve jobs and maintain supplier and customer relationships.

Employee, Director Entitlements and Redundancy Pay

A CVL process allows for the orderly winding down of the company, including the proper handling of claims for employee redundancy payments. Directors may also qualify for redundancy payments under certain conditions, providing some financial support during the transition.

Hold Position of Director at Other Limited Companies

Engaging in a CVL does not automatically disqualify a person from holding directorial positions in other companies. This means directors can continue to manage or start new business ventures, providing them the opportunity to apply their experience and lessons learned to new endeavours without the legacy of the previous company’s debts.

Disadvantages of a Creditors’ Voluntary Liquidation (CVL)

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 by paying the liquidator and the creditors.

Costs of Liquidation

Entering into a Creditors’ Voluntary Liquidation (CVL) incurs significant costs, primarily composed of the insolvency practitioner’s fees for managing the liquidation process. These fees, along with additional legal and administrative expenses, directly reduce the funds available for creditors. Early engagement with an insolvency practitioner can help estimate these costs more accurately, aiding in an informed decision-making process regarding the CVL.

Is a Creditors’ Voluntary Liquidation Right for My Business?

Deciding whether a Creditors’ Voluntary Liquidation (CVL) is the correct path for your business is a significant decision that requires careful consideration of your company’s unique circumstances. If you’re uncertain about the viability of a CVL for your business or if you’re exploring alternative insolvency options, seeking expert guidance is crucial. Our team of experienced professionals is here to provide you with the information and support you need to make an informed decision about the future of your company.

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