Pros and Cons of Creditors' Voluntary Liquidation

Reviewed by

Chris Andersen

30th August 2024

Choosing to enter Creditors’ Voluntary Liquidation (CVL) involves making some tough decisions, as it means permanently shutting down the company^[1]Trusted Source – GOV.UK – Creditors Voluntary Liquidation.

On the positive side, a CVL allows directors to control the timing and process of liquidation, offering them the advantage of a more orderly and less disruptive closure compared to compulsory winding up. Directors also have the opportunity to choose their preferred liquidator, potentially easing the process and ensuring it aligns with their needs.

On the negative side, a CVL entails closing the company for good, with all operations coming to an end. The process is publicly documented, which may affect the company’s reputation. Furthermore, it triggers an investigation into the directors’ conduct and incurs significant costs, which could reduce the funds available for creditors.

Contents

Advantages and Disadvantages of a Creditors’ Voluntary Liquidation
Advantages of a Creditors’ Voluntary Liquidation (CVL)
Disadvantages of a Creditors’ Voluntary Liquidation (CVL)

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Advantages and Disadvantages of a Creditors’ Voluntary Liquidation

Advantages	Disadvantages
Directors control the timing of liquidation	The company is permanently closed
Directors choose the liquidator	Creditors’ meeting must be publicly advertised
Unsecured debts are eliminated	The liquidator manages all creditor communications
Leases can be cancelled or renegotiated	Directors’ conduct is investigated
Liquidator manages all creditor communications	Shareholders unlikely to receive returns
Minimises operational disruptions during closure	Significant liquidation costs reduce funds for creditors
Halts legal action from creditors
Demonstrates responsible action by directors
Preserves asset value by avoiding fire sales
Allows directors to start new ventures debt-free
Enables business transfer via pre-pack sale
Ensures proper handling of employee entitlements
Directors can still hold positions in other companies

Advantages of a Creditors’ Voluntary Liquidation (CVL)

Benefits to Company Owners

You Can Choose When to Start: Directors have the power to initiate liquidation at the most strategic time for the company.
You Can Select a Trusted Liquidator: Directors get to appoint an insolvency practitioner they believe will best handle their specific situation.
It Eliminates Unsecured Debts: The process allows for the write-off of unsecured debts, providing financial relief.
It Allows Exit from Unfavorable Contracts: The company can terminate or renegotiate problematic leases and agreements.
It Provides Professional Creditor Management: A liquidator takes over all creditor communications, reducing stress on directors.
It Enables a Structured Business Closure: The process allows for an orderly wind-down, minimizing disruption to stakeholders.
It Halts Creditor Lawsuits: Once initiated, it prevents creditors from taking legal action against the company.
It Can Reduce Personal Liability: Taking this step can demonstrate responsible management, potentially protecting directors legally.
It Can Preserve Asset Value: Acting voluntarily and early often results in better asset valuations than forced liquidation.
It Offers a Fresh Start: Directors can move on to new ventures without the burden of old company debts.
It Can Allow Business Continuity: Viable parts of the business can be transferred to a new company through a pre-pack sale.
It Ensures Proper Handling of Entitlements: The process manages employee redundancies and entitlements correctly.
It Doesn’t Disqualify You from Other Directorships: Directors can still hold positions in other companies after a CVL.

Benefits to Creditors

It Stops the Need for Debt Collection: Creditors no longer need to chase payments, as the liquidation process takes over.
It Gives Creditors a Voice: Creditors can participate in appointing the liquidator, ensuring their interests are represented.
It Prompts an Investigation of Company Management: Directors’ conduct is formally investigated, providing accountability.
It May Allow VAT Recovery: In some cases, creditors can reclaim VAT on bad debts through this process.

Disadvantages of a Creditors’ Voluntary Liquidation (CVL)

Disadvantages to Company Owners

It Means the End of Your Business: The company will cease to exist permanently, with no option to reopen under the same name.
It Makes Your Financial Troubles Public: Details of the liquidation are published, potentially affecting your reputation.
It Subjects Directors to Scrutiny: Your actions as a director will be investigated, which could lead to penalties if misconduct is found.
It Typically Wipes Out Shareholder Value: Shareholders are unlikely to receive any returns as creditors are paid first.
It Involves Significant Costs: The process incurs substantial fees, which reduces the funds available to pay creditors.

Disadvantages to Creditors

It Disrupts Expected Income: Creditors may face delays or reductions in payments they were counting on.
It Often Results in Partial Payment: After priority claims are settled, unsecured creditors may recover only a fraction of what they’re owed.
It Doesn’t Guarantee Full Repayment: Unless director misconduct is proven, creditors can’t pursue directors for unpaid company debts.
It May Result in Unrecoverable Losses: Some debts might be completely written off, leading to financial losses for creditors.
It Often Leads to Discounted Asset Sales: Company assets are frequently sold below their book value, potentially reducing the amount creditors can recover.

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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.

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