Voluntary Liquidation
Creditors' Voluntary Liquidation

Click here for assistance now!
Creditors' Voluntary Liquidation (CVL) is a formal, commonly invoked procedure used to close a limited company that is no longer solvent; it is the most common form of liquidation. The company will have reached a position where it has:
  • little or no cash-flow;
  • outstanding debts it cannot meet; and
  • creditors who are lobbying for payment.
Once the decision has been made to enter CVL the company:
  • should stop trading;
  • must not accrue further debts or liabilities; and
  • should approach an Insolvency Practitioner who will assist with calling the necessary meetings.
Following appointment, any assets owned by the company will be placed in the hands of the Liquidator who will arrange for the realisation of the assets and distribute any proceeds amongst creditors of the company in accordance with insolvency legislation. A CVL should not be confused with Compulsory Liquidation which is when one or more of the company’s creditors (or others as prescribed) apply to the Court for a Winding up Petition.

Behaviour of Company Directors
It is imperative that the directors of an insolvent company are seen to act responsibly and they must approach an Insolvency Practitioner as soon as it becomes clear that the company is no longer viable. Failure to do so can carry serious consequences, their behaviour is likely to be questioned and action for wrongful trading, which can risk personal assets or disqualification, could be taken.

Buy Outs
Existing directors of a company, shareholders, employees, or other interested third parties can apply to the Liquidator to buy the assets of the company so that they can continue to trade in a similar line of business. This is referred to as phoenixism. However, there are strict rules on the name that the new company can use to trade under. Bids for the company assets must be at the market price as determined by independent valuation arranged by the Liquidator. The Liquidator will usually sell the company's assets to the highest bidder.

The advantages of Creditors' Voluntary Liquidation
Entering into Creditors' Voluntary Liquidation carries advantages for the parties involved, including:
  • providing directors with the opportunity to take back control of the situation;
  • releasing directors from their commitments to the company enabling them to move on;
  • creditors are bound by the liquidation process which means that they cease putting pressure upon the directors to repay debts;
  • ceasing to trade reduces the likelihood that directors will be accused of wrongful trading;
  • redundant employees will receive some redundancy pay and where this cannot be made from company assets the Redundancy Payments Office will step-in.
  • company assets can be purchased and a new company can begin or continue to trade.

Beginning the Process
Once an Insolvency Practitioner has been approached they will arrange to meet the board of directors to ascertain the current position. If they agree that a CVL is the most appropriate way forward they are likely to agree to act as proposed Liquidator.

They will then arrange two separate meetings, a General Meeting for shareholders of the company, and one for creditors, a Section 98 (Insolvency Act 1986) meeting. The meetings can be held on the same day, fifteen minutes apart or the creditors’ meeting may be held 14-21 days after the shareholder meeting; although a delay between the meetings is rare and only appropriate in certain circumstances.

A company director will chair the meetings, aided by the Insolvency Practitioner. Creditors must be given at least 7 days notice and shareholders notice as per the Company Articles. The Insolvency Practitioner will also arrange for a notice to appear in the London Gazette.

Once the meetings are concluded the company enters liquidation.

Statement of Affairs
In the time between first approaching an Insolvency Practitioner and the meetings referred to above, directors should prepare a Statement of Affairs and report to present to the creditors meeting. This will detail:
  • all the assets of the company;
  • the likely value of the assets being realised;
  • the trading history; and
  • what problems were encountered and why they led to the business failing.

Shareholders’ Meeting
A minimum voting in favour in person or by proxy (depending on the Company's Articles) of 75% of the shareholders is required. Shareholders will pass a resolution to appoint a Liquidator and if so who should be appointed.

Creditors’ Meeting
The creditors’ meeting is usually held directly following the shareholders’ meeting. The report prepared by the directors and a Statement of Affairs will be presented. Although creditors do not usually attend, this is their opportunity to table questions about the business and the behaviour of directors. Creditors vote on the appointment of a Liquidator with the decision decided on a simple majority (over 50%). Creditors can vote in person or by proxy by completing a form and returning it to the office of the proposed Liquidator or by sending a proxy to the meeting.

The responsibilities of the Liquidator
Once appointed the Liquidator will:
  • realise the assets of the company;
  • keep creditors informed of progress;
  • deal with claims from employees;
  • investigate the circumstances surrounding the liquidation including the behaviour of directors;
  • report on the behaviour of directors; and
  • where monies are available, agree claims so that creditors can be paid a dividend, as per the legislation.

Disadvantages of a CVL
Disadvantages associated with a CVL include:
  • fees and disbursements paid to a Licensed Insolvency Practitioner for their services;
  • tax losses built during the period before the liquidation are lost;
  • shareholders are likely to walk away with nothing.
Whilst a CVL is a quick and efficient way of winding up a failing business it should only be considered where a company is clearly no longer viable. It should never be considered simply as a means of getting rid of outstanding debts if other options are available.

Members’ Voluntary Liquidation
Members’ Voluntary Liquidation is the opposite of a CVL in so far as it is the means whereby a solvent and viable company can stop trading and disband. This could be due to retirement, shareholders may wish to realise their investment, or members of a family may decide they can no longer work together in a family concern. Any company considering a MVL must have assets, the value of which exceeds all debts and liabilities. It is unusual for a company with assets of less than £25,000 to pursue MVL. This must be sworn by a majority of directors or, if two, both of them.

MVL Process
Directors will hold a board meeting to which they will invite a Licensed Insolvency Practitioner. The Board will decide to:
  • convene a General Meeting  for shareholders;
  • appoint a director to chair the meeting;
  • arrange to sign a Declaration of Solvency in the presence of a solicitor and prepare a statement of assets and liabilities which will be attached to the Declaration.

At the EGM
Shareholders must be notified in advance of the decisions they will be asked to make at the meeting. They may not have to attend in person and, subject to the Company's Articles, may be able to vote by proxy. They will usually be asked to agree;
  • to the MVL;
  • the appointment of a Liquidator;
  • Liquidator fees and disbursements; and
  • that the assets can be distributed.

Short-notice EGM
With the agreement of 90% of the shareholders the notice period stated in the Company's Articles may be dispensed with and the meeting held earlier and even on the same day as the directors’ board meeting.
The role of the Liquidator
The Liquidator will:
  • Place a notice in the London Gazette and an advert advising the decision of the company board to pursue a MVL;
  • deal with the disposal of assets and payments to creditors (this should be within 12 months);
  • arrange a distribution to shareholders;
  • prepare a final report and summon a final meeting of shareholders; and
  • notify Companies House so the company can be dissolved.

Advantages of a MVL
Other than paying the fees of a Licenced Insolvency Practitioner there are few disadvantages to winding up a viable company and realising the company assets. Furthermore the process can be done very quickly. Entering into an MVL carries lucrative tax benefits for the shareholders as it is classed as capital and not income and consequently subject to Capital Gains Tax rather than Income Tax. In addition, shareholders who own 5% or more of the shares may have their tax liability reduced further through Entrepreneurs’ Relief and may be eligible for a tax of only 10% on their shareholder distribution.
More Important Information

Click here for assistance now!
Yes, we can help! Click on the button or give us a ring now.

O845 O94 4439

Privacy Policy       Terms and Conditions       Home

We are Jones Lowndes Dwyer LLP, of 4 The Stables, Wilmslow Road, Didsbury, Manchester M20 5PG.
Telephone number: O845 O94 4439 (5 lines).

* Depending upon your call plan, calls to 0845 numbers can cost up to 7p a minute plus your network's connection charge, if any.
We use cookies to give you the best experience. If you continue to browse, we'll assume you're happy with this. See our privacy policy