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.
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
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.
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
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.