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HomeFinance and AccountingInsolvencyUnderstanding Creditors' Voluntary Liquidation: A Guide

Understanding Creditors’ Voluntary Liquidation: A Guide

Voluntary Liquidation
Image by Robert Owen-Wahl from Pixabay

Voluntary Liquidation

Creditors’ Voluntary Liquidation (CVL) is a formal insolvency procedure that allows a company to voluntarily close down and liquidate its assets to pay off its debts. This is done when a company can no longer afford to pay the company debts and creditors are pressuring for payment.

If you’re a director of a company that’s struggling to meet its financial obligations, you might be considering a CVL. In this guide, we’ll discuss everything you need to know about Creditors’ Voluntary Liquidation.

What is Creditors’ Voluntary Liquidation (CVL)?

A CVL is a formal insolvency process that’s initiated voluntarily by the directors of an insolvent company. The process involves the appointment of a licensed IP who acts as the liquidator. The liquidator is responsible for selling the insolvent company assets to pay off outstanding creditors’.

The main purpose of a CVL is to provide a legal framework for the orderly closure of the company’s affairs that are insolvent. The term insolvent means that the company is unable to pay its debts as they fall due or its liabilities are greater than its assets.

When is a CVL the best option?

A CVL is typically the best option for an insolvent or distressed company that’s no longer viable or sustainable. This can be due to various reasons, such as declining sales, increased competition, or financial mismanagement.

If your company is facing financial difficulties and you’re unsure whether a CVL is the best option for your limited company, it’s essential to seek professional advice from an insolvency practitioner. As a limited company director, you may be entitled to claim redundancy if your company enters into an insolvent liquidation process.

What are the advantages of a CVL?

There are several advantages to choosing a CVL:

  1. Control – The directors have control over the process, and they can choose the insolvency practitioner to act as the liquidator.
  2. Reduced personal liability – The directors can reduce their personal liability for the company’s debts.
  3. Fresh start – The company can be wound up, and the directors can start a new business venture.
  4. Speed – The process can be completed within a few months, providing a quick resolution for unsecured creditors.

What are the steps involved in a CVL?

The following are the steps involved in a CVL:

  1. Directors’ meeting – The company directors must pass a resolution to wind up the company and appoint an insolvency practitioner as the liquidator at a shareholders meeting.
  2. Creditors’ meeting – A general meeting of creditors is held, and the authorised insolvency practitioner will be appointed liquidator.
  3. Liquidation – The liquidator takes control of the company’s assets and sells them to get the best return for company creditors.
  4. Final meeting – A final meeting is held, and the liquidator presents a final report on the process to the creditors in accordance with the insolvency act.
  5. Dissolution – The company is dissolved and struck off the register at Companies House. This concludes the company liquidation and the company ceases to exist as a legal entity.

What are the implications of a CVL?

The implications of a CVL are:

  1. Employees – The company’s employees will be made redundant, and they can claim redundancy pay from the government. Employees who are owed arrears of wages and holiday pay are classed as preferential creditors, and they will receive a distribution once fixed charge secured creditors have been paid.
  2. Creditors – The company’s creditors will receive a dividend from the liquidation, but they may not receive the full amount owed.
  3. Directors – The directors may face disqualification or other legal action if they’re found to have been found to be wrongful trading.

Conclusion

Creditors’ Voluntary Liquidation (CVL) is a formal insolvency process that allows a company to close down voluntarily and liquidate its assets to pay off its debts. It’s typically the best option for a company that’s no longer viable or sustainable. The creditor’s voluntary liquidation process provides control, reduced personal liability, a fresh start and speed.

If you’re considering a CVL, or MVL or want information on compulsory liquidation it’s essential to seek professional advice from a fully licensed insolvency practitioner to ensure that you understand the implications of the process and make an informed decision and know the company’s financial position. Remember, seeking professional advice early on can help you avoid personal liability and make the process as smooth as possible for all involved parties. Contact Company Doctor on 0800 169 1536 or visit our website at www.companydoctor.co.uk

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