The Working of A Creditors Voluntary Liquidation

1.  The Working of A Creditors Voluntary Liquidation Blog / By Jamie Playford No company director likes being in the position of having to make the decision to enter into a Creditors Voluntary Liquidation (CVL). Whilst an insolvency practitioner is experienced in finding ways for companies to avoid what seems like an inevitability, sometimes it is just not possible to save the company. When in this scenario, with creditors knocking on your door daily and demanding payment, choosing to go into liquidation rather than being forced into it is a better option.

2. When making the decision, it helps to understand what a CVL is, how it works and the impact it will have on the company and its shareholders/directors. What is a Creditors Voluntary Liquidation (CVL)?   A CVL is a formal procedure for insolvent limited companies that are winding up the business due to debt. Because it’s voluntary, the directors of the company have chosen to close the business, usually after all other attempts to save the business have failed. To decide whether a company is considered insolvent, there are two predominant tests to carry out – the cash flow test and the balance sheet test. The cash flow test is when the company is not able to meet its liabilities when they fall due. The balance sheet test shows that the company’s liabilities are greater than its assets. At the point of deciding the company is insolvent, no further credit is available and it is also not advisable for the directors to pay one creditor more than another. It could be considered a preference payment and the director may become liable for the payment upon liquidation of the company. It is also wise to ensure the safety of any assets, inventory or capital currently held by the company. It should not be sold or moved from the company as the assets will be realised to pay the creditors. Usually, when a company becomes insolvent, it ceases to trade. If the legal procedures of administration and CVAs (Company Voluntary Arrangement) have not been successful, a CVL is probably the best option for the company. Assets will be sold at market value to raise as many funds as possible to pay creditors. Any shortfall will be written off once the company has been liquidated, unless any company debts have been personally guaranteed by the directors; they are then responsible for the outstanding debt. How does a CVL work? The first person to contact is a licensed insolvency practitioner as they are the people that will enter the company into the CVL process and take control of the company. The directors of the company are expected to work with the insolvency practitioner and in return, they will provide the much needed advice. Let’s go through the stages of a CVL. 1. Director(s) meeting – the CVL is initiated by the company’s directors by informing the shareholders that the company is insolvent and must cease trading. An insolvency practitioner is officially appointed and calls a meeting with the company’s creditors within 14-21 days. At the meeting, the creditors take a vote to appoint a liquidator – sometimes this is the company directors’ insolvency practitioner, sometimes the creditors appoint their own liquidator. The majority of the time these

3. meetings are held in a virtual environment. However, if 10% or ten individual creditors request to hold it in a physical location and that has to be adhered to. 2.  Notice to creditors and shareholders – once the decision has been made to enter into liquidation, the creditors and shareholders are notified and presented with what is known as an Estimated Statement of Affairs of the company. This sets out its financial position, details any assets and liabilities, provides an estimated value of the company’s assets and an estimate of the debt to creditors. At this point, the appointed liquidator is approved and the liquidation process starts. 3.  The liquidation process – the liquidator takes control of the company, liaises with the creditors, resolves any claims and arranges for the company’s assets to be valued so that they can be sold at market value to raise the necessary funds to pay the outstanding creditors. As long as the directors of the company have not acted in an unlawful or fraudulent way, they have the option to buy back company assets as long as the liquidator handles the sale and they are bought at market value. During the process, the liquidator will collect any outstanding invoices, resolve employee claims, file the necessary reports with the relevant government agencies, place an advert in The Gazette to announce the company liquidation and deal with any other matters that may arise. Once the assets have been sold and the funds collected, it is the liquidator’s job to distribute amongst the creditors following a set order of priority that is in accordance with the Insolvency Act 1986. 4. Completing the liquidation process – once the assets have been sold, the creditors have been paid and the final reports have been submitted, the liquidator advises Companies House and the company is removed from the official register, thereby ceasing to exist. Any liabilities that have not been paid are written off and the directors, as long as they are not part of an investigation into their actions, are free to move on. Directors of a liquidated company are allowed to set up a new business but they are not able to trade with a similar or identical name to the previous company, or a similar trade. Entering voluntary liquidation does have its benefits: Any outstanding debt is written off, including HMRC liabilities and those with trade suppliers Creditor demands are dealt with by the liquidator Any legal action against the company ceases Staff are able to claim redundancy pay Any company leases are cancelled  The company avoids going through the court  The company is completely closed down. However, there are also disadvantages:  Potential of being accused of wrongful trading, which could lead to a ban to act as a director for as long as 15 years  A director that has personally guaranteed a company debt will be held personally responsible for that debt upon liquidation. In addition, if, from the liquidator’s report to the Department for Business, Innovation & Skills (BIS), the director is considered as having liquidated the company to avoid paying the debts, they could be held personally liable due to improper actions.

4.  If the directors’ current accounts are overdrawn upon liquidation, they are held personally responsible for repayment, and the liquidator has the power to force the directors to pay the debt.  All assets of the company are sold to raise the funds to pay the creditors, and the insolvency practitioner.  All company staff are made redundant when the business goes into liquidation. No company director takes the decision to liquidate a company lightly and there is an impact of doing so. Before you decide that this is the only option, discuss your position with one of our professional experienced insolvency practitioners on 0800 246 5895 or visit our website. ← Previous Post Next Post → Recent Post What’s the Purpose of Insolvency and Bankruptcy Law? 07/07/2021 Insolvency Practitioner and Business Recovery Professionals 16/06/2021 How Creditors Voluntary Liquidation Works and the Effect on the Business? 09/06/2021 Business Recovery and Insolvency Practitioner of the UK 02/06/2021 An Overview of Insolvency Practitioner Services in the UK 25/05/2021

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