A CREDITORS VOLUNTARY LIQUIDATION (CVL) IS THE MOST COMMON FORM OF LIQUIDATION IN THE UK
It quickly removes creditor pressure.
Stops further legal action.
Allows employees to claim reundancy from the government.
Can allow you to continue trading under a different legal entity.
A quick cost effective way of closing down company.
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What is a creditors voluntary liquidation (CVL)?
It is a process started by the directors of an insolvent company. They believe the company is not viable to continue, is insolvent and must stop trading and they inform the company shareholders of this at a shareholder’s meeting.
The company in question will usually have ran out of cash so liquidating the company, via CVL, is a quick and easy way to close the business. The company will close, leases will be cancelled, staff will be made redundant and directors can go on to open a completely new business or a similar business to the current one, known as a phoenix company.
After the shareholders meeting, the shareholders appoint an insolvency practitioner (IP) to call a creditors meeting. A creditors meeting is convened and agreement is reached on the appointment of a liquidator. This will start the liquidation process and put an end to the company for good.
When is a CVL appropriate?
Your company may be struggling but when is it appropriate to place your company into a CVL?
- When your company is insolvent and can no longer afford to pay its liabilities to creditors, staff wages etc.
- The company no longer appears to be viable even if it was to be restructured completely.
- The process of CVL could be used as part of restructuring a group of companies for the group’s benefit.
- The directors do not feel they want to work on restructuring the company or saving it and would rather liquidate.
- The market in the company’s sector has declined and no longer requires the company’s products and/or services.
So you have decided your company would benefit from entering into a CVL. What do you, as a director, have to do through the process? And what role does the appointed IP (known as liquidator throughout the CVL procedure) undertake?
The role of the director
As the director of the insolvent company entering liquidation, you will have to answer any questions and provide all information required by the liquidator. You will have to provide the company books and records and you will have to attend the creditors meeting where the vote to appoint the liquidator takes place.
The role of the liquidator
If you appoint us as the liquidator, we will run the liquidation by completing all paperwork, organising all meetings of creditors, shareholders etc. and they will investigate the director(s) conduct in the three years preceding the liquidation.
After the liquidation process has started, the liquidator will collect any assets and turn them into cash which will be paid to creditors on a pro rata basis, after deducting any costs and fees.
During the liquidation procedure, the liquidator will have to:
- Complete a realisation of assets, turning the business assets into cash.
- Receive and process claims from creditors to work out how much is owed and to whom.
- Investigate the directors (including any shadow directors) of the company and report upon their conduct to the relevant parties and/or authorities.
- Make payments to the company’s creditors on a pro rata basis, when and where money is available.
The CVL process
As a director, as soon as you discover the company is insolvent and can see no prospect of the position improving, you must cease trading. To carry on trading when you are aware your company is insolvent is known as ‘wrongful trading’ and this is illegal. As director, you have a duty of care to your creditors and to carry on wilfully trading when insolvent shows that you have not considered them.
Wrongful trading can result in you losing your limited liability status granted to you as a director of a limited company. This means that you will be personally responsible to cover all debts from the point of wrongful trading. If you are found to have done this, you could face criminal proceedings and will usually be banned from being a company director for a number of years.
A director should call a meeting of company shareholders where shareholders will be informed that the company is insolvent and will not be able to pay back existing creditors. Shareholders will then be advised that the company should cease trading and be voluntarily liquidated.
The shareholders will nominate a liquidator. Before the creditors meeting takes place, the liquidator will place an advert in The Gazette and in 2 local papers, they will also write to all known creditors.
The purpose of this is to gather together all claims of debts owed by the company so the liquidator can get an idea of the total money owing and who needs to be paid after sale of assets. At the creditors meeting, a liquidator will be appointed by vote to start the liquidation procedure. Creditors can elect to form a creditors committee to monitor the liquidation process and the liquidators conduct. There must be between 3 and 5 members within this committee.
The Benefits of a CVL
- The position of the creditors will not deteriorate.
- Directors can avoid the risk of wrongful trading by ceasing trading early and dealing with the situation of insolvency promptly.
- The company will come to a formal end leaving the director(s) free to follow other interests.
The Drawbacks of a CVL
- The company assets tend to be sold for less than their balance sheet value in the liquidation process. This lowers the return to creditors who are already likely to lose money owed to them through liquidation.
- There will be no monetary return to the shareholders.
- Any goodwill the director(s) had will be lost and some business relationships may be damaged. This is particularly harmful for directors wishing to set up a phoenix company or a brand new company in future.
A liquidator has to sell the assets of the business in liquidation and can sell them to former directors or shareholders who wish to set up a similar company. This process is known as a phoenix company. Phoenix companies are legal provided all rules surrounding this type of company are observed and the liquidator maximises the interests of the creditors by selling the assets in this way.
By selling the assets to directors/shareholders, the liquidator must be able to confirm that:
- They have obtained the best value for the business assets by using the services of a RICS qualified valuer.
- They have confirmed the trading name of the new phoenix company is not the same or similar to the liquidated company. If it is, certain rules must be followed.
The way a phoenix company comes about is that a company ceases trading and is liquidated. During this process, the director(s) and/or shareholder(s) buy assets from the liquidator at market value. They form a new company and start to trade.
There are two major issues to a phoenix company. Firstly, there are many legal problems that can arise so good advice should be taken prior to setting up the company.
Secondly, the company will require cash to operate but the company may not have any employees to carry out the work for them. The staff of the old company are not necessarily transferred across to the new company via TUPE (transfer of undertakings) so they may lose valuable staff and will have to recruit from scratch.
TUPE is a piece of legislation which states that an employee’s contract (inc. salary, job title etc.) has to remain the same. It is a complex issue that can trip many new phoenix companies, as well as those taking over a business, up.
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