What Is a CVL?
A Creditors’ Voluntary Liquidation – or CVL – is an effective solution for insolvent companies looking to resolve their debt issues. The director hands over control of the company to a liquidator, helping to repay creditors and avoid any legal issues.
As the most common form of liquidation in the UK, a CVL offers a range of benefits:
- Stops pressure from creditors in as little as 14 days
- Writes off company debts
- Safeguards directors from legal issues
- Usually comes at no personal cost
In this guide, we’ll explain how to know if your company is insolvent, why you should consider a CVL, and what alternative solutions are available.
Contents
How Do I Know If My Company Is Insolvent?
Knowing whether a company is insolvent is vital for any director. This is because insolvency fundamentally changes your legal duties.
You can test if your company is insolvent by answering two simple questions:
- Can your company pay its debts when they fall due?
- Does your company have more liabilities than assets?
If the answer to either of these questions is yes, your business is insolvent.
Why Should I Consider a CVL?
Liquidating your company isn’t an attractive prospect for any director. It’s natural to wish to keep trading until left with no other option.
So, why would you enter into liquidation voluntarily?
Ultimately, it’s because your legal duties as a director change when your company becomes insolvent. You must place the interests of your creditors first, not those of the company or its shareholders.
Many directors continue to trade, hoping that things will turn around. Unfortunately, this often results in the company racking up even more debt. This weakens the position of your company’s creditors, putting you at risk of claims being made against you for misfeasance or wrongful trading.
Misfeasance is a civil charge outlined in the Insolvency Act 1986, which applies to directors who have failed to uphold their fiduciary duties.
Wrongful trading is a civil charge outlined in the Insolvency Act 1986, which applies to directors who continue to trade when they knew – or ought to have known – the company was insolvent.
What Are the Advantages of a CVL?
A Creditors’ Voluntary Liquidation offers a range of benefits to insolvent companies.
One of the most immediate benefits is peace of mind; the process can relieve pressure from creditors in as little as 14 days, preventing them from contacting you directly. They’ll have to refer to your appointed liquidator if they have any enquiries.
Directors may also be able to claim redundancy. The amount you’ll receive depends on your age, length of employment, and the size of your salary.
Once the liquidation process is complete, all of your company’s debts will be written off. There are some exceptions – for example, you may have a personal guarantee or an overdrawn directors account – but these can be discussed with your liquidator.
What Is the Process of a CVL?
You can find out more about the process of a CVL by exploring the tabs below.
Before you commit to anything, you must have a frank discussion with an insolvency practitioner about your company and its affairs.
You may find that you can work out an informal agreement with creditors instead, or you may be able to pursue a business recovery option.
If it’s decided that a CVL is the best option for you, then you’ll need to arrange a formal meeting with the rest of your company directors.
You’ll need to collectively resolve to liquidate the company and formally appoint a liquidator. The liquidator must be a licenced insolvency practitioner.
A shareholders’ meeting must be held once you’ve formally resolved to liquidate the company.
In order for the liquidation to go ahead, you need the backing of 75% of the shareholders (by value). Once the voting has taken place – if approved – the company officially enters liquidation.
This typically takes place at the same time as the shareholders’ meeting.
Your creditors must reject or ratify your choice of liquidator. Typically, they’ll approve through deemed consent, where a lack of response serves as confirmation.
Creditors cannot vote against the company entering into liquidation.
Once everyone is in agreement, the liquidator can begin proceedings. The director hands over control of the company to the liquidator.
The liquidator will sell the company’s assets, using the funds to cover the liquidation costs and repay creditors. Any remaining debts are then written off.
Once liquidated, the company is legally dissolved and struck off the Companies House register.
Liquidators have a statutory duty to investigate the conduct of company directors in the lead-up to insolvency. They must identify potential misconduct and report their findings to the Insolvency Service by way of a confidential Director Conduct Report within 3 months of a company entering into liquidation.
An adverse report can lead to disqualification, personal liability for company debts, or criminal prosecution.
What Are the Alternatives to a CVL?
If your company is insolvent but you don’t want to place it into liquidation, there are some other options to consider.
If your company is insolvent – perhaps due to a temporary gap in the balance sheet, etc – but is still viable, a Company Voluntary Arrangement may be the answer for you.
A Company Voluntary Arrangement functions as a repayment plan to creditors, offering a range of benefits:
- Freezes interest and charges
- Spreads out repayments over 2-5 years
- Protects the business from closure
- Allows some debts to be written off
You’ll need the backing of 75% of your creditors to enter a CVA. Our team will help you craft a proposal that is affordable for you and attractive to your creditors.
Administration places control of the business into the hands of an administrator, who will look to achieve one of three outcomes:
- Rescue the company as a going concern
- Achieve a better outcome for creditors than a liquidation
- Realise assets to make a return to secured or preferential creditors
The administrator will look to save the company, where possible, before defaulting to one of the other options. Although administration doesn’t offer any guarantees, the breathing space it provides can allow for a successful turnaround.
A company can be wound up by court order, usually when a petition has been presented by one of its creditors due to non-payment of an outstanding debt.
Initially, an Official Receiver (a government body) deals with the liquidation, although an external Insolvency Practitioner can be appointed if necessary.
A director can also ask a court to make an order that a company should be wound up.
Get Free Advice Today
If you’re struggling with corporate debt, it’s crucial you speak to an insolvency practitioner as soon as possible.
Our team can assess your situation and advise you on the best course of action for you and your company.
Get in touch to book a free consultation today.
FAQs
Generally speaking, you’ll be restricted from reusing the name in another company for 5 years. However, there are some exceptions. You can read more in our guide on reusing company names.
The cost of a CVL depends on the size and the complexity of the business and its debts. Get in touch with our team today for a quote tailored to your company’s individual situation.
Creditors are entitled to three clear business days’ notice of a proposed liquidation, however practically, the company will likely enter into liquidation 14 days after the directors resolve that it should.
How long the administration of the liquidation takes depends on the size of the business and the assets involved. There is no set timeframe for a company to be dealt with and dissolved at Companies House.
Many directors worry that their company entering into insolvency will negatively impact their credit score. However, a company is registered as its own legal entity, so its finances are separate from yours. This means that your credit score will be unaffected.
- Paying yourself a salary that is too high when considering the financial position of your company
- Selling your assets at a level below market value to divert them away from your creditors
- Concealing assets during the liquidation process to avoid them being sold off
- Making preferential payments, prioritising paying one party over another (for example, only paying a creditor that you have a personal guarantee with)
