On the plus side, a CVL can be a way to take control of a situation where a company can’t pay its debts. It shows decisive action and typically provides more control to directors than waiting for compulsory liquidation.
However, CVLs do trigger investigations into directors’ conduct, plus there is a cost involved, which sometimes has to be covered by the directors themselves.
Advantages and Disadvantages of a Creditors’ Voluntary Liquidation
Advantages
Disadvantages
Control over Timings: Directors decide when the liquidation begins.
Company Will be Closed: The company is permanently closed and cannot be reopened.
Choice of Liquidator: Directors select their preferred liquidator.
Public Process: The creditors’ meeting must be advertised in The Gazette.
Unsecured Debts Written Off: Unsecured debts are eliminated, reducing stress.
Investigation into Conduct: Directors’ conduct will be investigated for potential misconduct.
Leases Can Be Cancelled: Option to cancel or renegotiate leases.
No Returns for Shareholders: Unlikely any returns for shareholders as proceeds go to creditors.
Liquidator Deals with Creditors: Liquidator handles all creditor communications.
Costs of Liquidation: Significant costs incurred, reducing funds available for creditors.
Orderly Shutdown: Minimises disruptions to operations and stakeholders.
Stops Legal Action: Creditors cannot take legal action once CVL starts.
Mitigation of Directors’ Liability: Shows responsible action, protecting directors legally.
Preservation of Business Value: Maximises asset value by avoiding fire sales.
Provides a Clean Slate: Directors can start new ventures without old debts.
Continue Operations Through a Newco: Business can transfer to a new company via pre-pack sale.
Employee and Director Entitlements: Proper handling of redundancy and entitlements.
Directors Can Hold Other Positions: Directors can still be directors in other companies.
Advantages of a Creditors’ Voluntary Liquidation (CVL)
Control over Timings
CVL allows the directors of a limited company to control when the liquidation process begins. This is a notable advantage compared to compulsory liquidation, where the company’s creditors force the company into closure, and the directors are powerless.
Choice of Liquidator
Directors have the advantage of choosing their liquidators in a CVL. This choice allows them to pick an insolvency practitioner with whom they feel comfortable and who they believe will manage the liquidation process sympathetically, considering the best interests of all parties involved.
Unsecured Debts Are Written Off
One significant benefit of a CVL is the ability to write off unsecured debts. For directors, the ability to leave company debts behind can provide tremendous relief from stress, and the ability to begin again.
Leases Can Be Cancelled
A CVL provides an opportunity to cancel or renegotiate onerous leases, whether they are property or equipment leases.
Liquidator Deals with Creditors
Once the liquidator (licensed insolvency practitioner) has been appointed, they’ll take over the job of dealing with your creditors. This can be a tremendous relief in situations where you frequently receive threatening calls and letters from creditors demanding payment.
Potential for an Orderly Shutdown
A CVL allows for an orderly shutdown of the company’s operations, minimising disruptions to employees, suppliers, and customers. You’ll get a clear timeline for the cessation of operations and the settlement of outstanding obligations.
Stops Legal Action
Once a company has entered into a CVL 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 an explicit sign that the directors are taking responsible steps to address the company’s financial distress. 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. Liquidating voluntarily at an earlier stage of financial distress sometimes maximises the value obtained from the sale of assets. 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 start new ventures, a CVL provides a formal method of leaving a debt-ridden company behind, so you can pursue new business interests.
Continue Operations Through a Newco and Acquire Assets via Pre-pack
A CVL can facilitate a fresh start by allowing the directors to transfer the viable business to a newly incorporated company. This typically involves a new company acquiring the assets of the old company through a pre-pack administration sale. Prepacks offer a potential route to preserve jobs, maintain relationships with suppliers and customers, and revive the company’s fortunes.
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.
Directors Can Hold the 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 move on to manage or start new business ventures.
Disadvantages of a Creditors’ Voluntary Liquidation (CVL)
Company Will be Closed
A Creditors’ Voluntary Liquidation means the company will be permanently closed. 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.
It’s a Public Process
A CVL requires that the creditors’ meeting be advertised in The Gazette, which means it is in the public record[2]Trusted Source – The Gazette – Insolvency Notices.
Investigation into Conduct of Directors
The liquidator is required to investigate the directors’ conduct in the period leading up to the company’s insolvency[3]Trusted Source – GOV.UK – Insolvent Company Investigations. They will look at whether the directors discharged their duties and whether there was 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.
Get Help from Company Debt
If you’re uncertain about the viability of a CVL for your business or 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 via practical advice, transparent communication and fair pricing.
