What Are the Pros and Cons of a CVL?
For insolvent companies in the UK, a Creditors’ Voluntary Liquidation (CVL) is the most common and highly recommended means of business closure.
The process allows directors to neatly wrap up a business that has no chance of financial recovery, greatly limiting any potential fallout that may come as a result of sitting around and waiting for the courts to force the company into liquidation.
But what are the advantages of a CVL? And what disadvantages should directors bear in mind? In this guide, we’ll be explaining all of the pros and cons presented by the process.
Contents
What Are the Pros of a CVL?
A CVL Helps to Protect You Legally
As the director of an insolvent company, your duty – by law – switches from serving the interests of the business and its shareholders to protecting the position of your company creditors.
Pursuing a CVL ceases the company from trading and prevents worsening the position of company creditors. This demonstrates that you’ve acted in their best interests, fulfilling your fiduciary duty.
Waiting around for things to get worse, resulting in compulsory liquidation, can reflect poorly on your conduct and lead to allegations of misfeasance, wrongful trading, and even fraudulent trading. These charges can have serious financial and legal implications.
Your Company Debts Are Written Off
A CVL seeks to repay creditors as much as possible through the sale of company assets.
Thanks to the protections of limited liability, once the liquidator has repaid creditors, any outstanding amounts will be written off.
This will allow you to move on to other ventures debt-free.
A CVL Gives You More Control
Pursuing a Creditors’ Voluntary Liquidation allows you to retain some control over proceedings, as opposed to compulsory liquidation.
While the liquidator will ultimately be responsible for proceedings, a CVL allows you to choose who gets appointed as liquidator, whereas compulsory liquidation sees the responsibility automatically go to the Official Receiver.
You’ll also be allowed more control over when the company goes into liquidation, allowing you to make important preparations, such as informing your employees.
The Liquidator Deals With Your Creditors
Once you’ve entered into a CVL, the liquidator will deal with satisfying the queries and demands of your company creditors, saving you the hassle. You’ll no longer be subject to alarming phone calls or written communications. This can be a huge relief if you’re struggling with the stress of the situation.
Employees Can Claim Redundancy Sooner
Paying employees their wage entitlements is naturally one of the most stressful elements of running an insolvent business, especially if you’re unable to make the payments.
Employees who rely on such wages will naturally be concerned and will want resolution. Having to wait for the company to be forced into liquidation will only serve to add to any pressure and uncertainty.
Directors May Be Eligible for Redundancy
Employees aren’t the only ones who can claim through the Redundancy Payments Service. Company directors also have the potential to make a claim.
If you can prove you’ve been an active member of staff for at least 2 years prior to the liquidation, you could be eligible for some redundancy entitlements. This will be based on your hours worked and length of service.
What Are the Cons of a CVL?
Your Company Is Closed
Of course, one of the biggest downsides to a CVL is the closure of the company. Nobody wishes to see the end of their business, but sometimes we’re left with no choice. Unfortunately, sometimes delaying the inevitable can result in bigger grievances down the line.
Staff Are Made Redundant
Naturally, when the company closes, so do employment contracts. This is one of the hardest things any employer can face. However, liquidation can allow staff to claim what they’re due sooner and move on to new pastures.
Personal Guarantees Will Be Carried Over
Sometimes, creditors will insist upon borrowed amounts being secured through a personal guarantee.
Personal guarantees stipulate that the borrower will become accountable for the amount should the business fail. Unfortunately, these will not be written off in a CVL.
The CVL Is Publicly Advertised
However, it’s worth bearing in mind that all insolvent company proceedings must be publicly advertised. The benefit of a CVL is that it demonstrates that a director has taken initiative and responsibility, as opposed to compulsory liquidation.
No Return for Company Shareholders
Unfortunately, by the time all company creditors and fees have been accounted for, it’s highly unlikely that any funds will be left to return to shareholders. Typically the funds don’t cover the entire amount owed, resulting in debt write-offs.
Liability for Overdrawn Director’s Loan Account
Sometimes a director may borrow from the company in what is known as a Director’s Loan Account.
As part of the liquidation process, all amounts owed to the company must be collected in order to repay creditors to the fullest possible extent. Overdrawn Director’s Loan Accounts are listed as one of these liabilities, meaning that you’ll have to repay any outstanding amounts.
Get Help Today
Company closure isn’t something any director hopes to face when opening a business. However, you’re not alone – 1 in 3 businesses close within their first 3 years.
When faced with insolvency, it’s important to take a measured and sensible approach in order to prevent further stress or losses. If your company is struggling financially, it’s best to speak to an insolvency practitioner as soon as possible.
Our insolvency practitioners can guide you to the best outcome for you and your business – in some cases, the business may actually be able to return to profitability through administration or a CVA. Get in touch and book a free consultation today.
