What is Creditors Voluntary Liquidation?

Creditors' Voluntary Liquidation (CVL) is a structured legal process through which a financially struggling company opts to close down its operations.

Unlike a Compulsory Liquidation imposed by external parties, a CVL is initiated by the company's directors and shareholders. In a CVL, an appointed licensed insolvency practitioner takes charge of realising the company's assets to repay creditors.

The process provides a formal and transparent method for winding up a company, distributing its assets, and ultimately dissolving it. CVL is a proactive choice for businesses facing insolvency, enabling them to handle their financial obligations in an organised and controlled manner while adhering to legal requirements.

Why put a Company into Creditors’ Voluntary Liquidation (CVL)?

Here are the reasons for putting a company into Creditors Voluntary Liquidation:

The company may have received a winding up petition or statutory demand from a trade creditor. Unable to pay its debts, it therefore wishes to place the company into a Creditors Voluntary Liquidation rather than a Compulsory Liquidation.

The company may be insolvent on a balance sheet test, by virtue of its liabilities exceeding the assets of the company. As a result losses are only increasing and without a turnaround in the business’s fortune the Directors are conscious that continuing to trade might infringe on wrongful trading.

The company is unable to pay its rent and as a result the landlord has appointed bailiffs to seize the assets of the company.

The company has fallen behind on a time to pay agreement with HM Revenue & Customs and as a result the company has been issued a winding up petition.

The company may have suffered a substantial bad debt and as a consequence is unable to meet its current liabilities which are now in arrears and trade creditors are now demanding payment.

There could be a significant shift within a company’s industry to the extent that it impacts on the ability to trade. For example, a sudden change in industry standards or fluctuations within the market which renders a company’s current principal trading activity loss making.

In light of these circumstances, it is of utmost importance to promptly seek guidance from an insolvency practitioner as soon as there are indications of the company facing losses and the business's future becoming uncertain.

Cornerstone Business Recovery offers a free initial consultation to discuss the financial position of the company and assess the current financial position. Please make contact with us via phone, email or book a meeting session.

What is the Process for Creditors’ Voluntary Liquidation?

Stage 1 – Board of Directors’ Meeting

The Companies Act of 2006 offers the framework for convening a General Meeting of shareholders with the purpose of passing a Special Resolution to wind up the company. This procedure commences during a Board of Directors meeting, wherein the formal appointment of Cornerstone Business Recovery to aid in organising the shareholders' and creditors' meetings takes place.

A specific date is designated for both the shareholders' and creditors' meetings, typically scheduled for the same day. The interval between the Board of Directors meeting and these subsequent meetings spans approximately 14 days, allowing ample time for notifications to be dispatched to the company's creditors.

These gatherings confer the authority upon Cornerstone Business Recovery to engage agents, communicate with the company's banking institutions, collaborate with HM Revenue & Customs, and access financial information from the company's accountants. This facilitates the comprehensive collection of financial data pertaining to the company.

It's noteworthy that this Directors meeting need not necessarily be conducted in person; virtual alternatives such as telephone conferences, Zoom, or Microsoft Teams meetings are viable options.

Stage 2 – The period between the Directors Meeting and the Creditors Meeting

notices will be dispatched to both creditors and shareholders, summoning them for the upcoming meetings, it is noted that the company hasn't yet entered formal liquidation. As such, the directors still retain their roles as office holders of the company and consequently bear the responsibility to act in the best interests of creditors.

Throughout this interim period, it's imperative that the Directors collaborate with Cornerstone Business Recovery to obtain comprehensive financial data regarding the company. This may involve facilitating the handover of accounting records. Such information is vital for generating the necessary report and Statement of Affairs that will be presented during the creditors' meeting.

In situations where the company possesses a range of fixed assets, skilled agents will be engaged to produce a thorough valuation report encompassing both forced sale and going concern values of these assets.

Shortly prior to the shareholders meeting, the directors’ sign a Statement of Affairs which is a summary of the assets and the liabilities of the company. This statement is obtained from the financial figures contained within the management accounting records of the company and any valuation reports received from professional agents who would have valued the company’s assets.

Furthermore, it's likely that Cornerstone Business Recovery will establish a mechanism through which employees can submit Redundancy forms to the Redundancy Payments Service. This process pertains to seeking compensation for various outstanding payments including wages in arrears, accrued holiday pay, redundancy compensation, and payments in lieu of notice.

Stage 3 – Shareholders Meeting

The nominated Chairman of the Shareholders meeting is usually a Director of the company who will present the Statement of Affairs to Shareholders. The shareholders will either be in attendance at the shareholders meeting or alternatively would have sent a proxy form either agreeing or rejecting the proposed winding up resolution.

In order for the winding up resolution to pass, it will require 75% of those sent notice of the shareholders meeting voting in favour of the resolution. In addition, the resolutions will appoint a Shareholders Liquidator from Cornerstone Business Recovery.

Stage 4 – The Creditors’ Meeting

Typically, a Creditors’ Meeting is scheduled to take place around thirty minutes to an hour after the Shareholders’ Meeting. While a director is selected to serve as the meeting's Chairman, an Insolvency Practitioner affiliated with Cornerstone Business Recovery will assist in overseeing the procedural aspects of the gathering.

During the Creditors’ Meeting, a comprehensive report meticulously crafted by Cornerstone Business Recovery will be presented. This report encapsulates a concise overview of the company's financial standing, incorporating essential statutory details, excerpts from the company's accounts spanning the past three fiscal years, an account of the company's trading history, the Statement of Affairs, a roster of creditors, and a deficiency account.

The meeting affords attending creditors an opportunity to query the Director concerning the company's operational activities and voice any concerns related to its affairs. Furthermore, creditors possess the liberty to request the liquidator's investigation into specific areas of concern.

The proceedings culminate with the presentation of resolutions, including the ratification and appointment of a liquidator for the company. Creditors who are unable to attend the meeting typically submit proxy forms to the Chairman, indicating their voting preferences.

In some cases, an alternative candidate for the role of Liquidator might be proposed by creditors. However, for the appointment of the Creditors' Liquidator, a majority of 50% of voting creditors in favor is required.

Stage 5 – The Company in Liquidation

Upon assuming the role, the Liquidator will oversee the necessary formalities associated with their appointment. This includes tasks such as informing Companies House and publishing a notification in the London Gazette.

The extent and intricacy of tasks the liquidator undertakes are contingent upon the unique characteristics of the case. These may encompass:

Engaging proficient agents for the systematic disposal of the company's assets.
Conducting an in-depth scrutiny of the company's records and accounts, culminating in the submission of a report to the Insolvency Services within a span of three months from appointment.
Enlisting specialised recovery agents for addressing other assets of the company, such as book debt agents.
Addressing claims of former employees at the Redundancy Payments office.
When feasible funds are available, the Liquidator will evaluate creditors' claims and oversee the distribution of funds to these creditors.

The duration of the liquidation process can span anywhere from 6 months to multiple years, contingent on the intricacies of each individual case.

In line with responsibilities, the Liquidator is bound to provide annual progress reports to all creditors and shareholders, outlining the developments in the liquidation during the preceding year. These reports are additionally submitted to Companies House in accordance with regulations.

Stage 6 – Concluding the Liquidation

The appointed liquidator concludes a liquidation through a series of well-defined steps and procedures. The specific process can vary based on the jurisdiction, the type of liquidation (voluntary or compulsory), and the complexity of the case. Here's a general overview of how a liquidation is typically concluded:

Realisation of Assets: One of the primary tasks of a liquidator is to identify, gather, and sell the company's assets. This can involve selling physical assets, settling outstanding debts, and collecting outstanding accounts receivable.
Investigation and Reporting: The liquidator investigates the company's financial affairs, transactions, and activities leading up to the liquidation. A comprehensive report is prepared for regulatory authorities and creditors, detailing the financial position of the company.
Resolution of Claims: Creditors are invited to submit their claims to the liquidator. The liquidator reviews and validates these claims, negotiating and settling where necessary. Claims can include debts, employee claims, and other obligations.
Distribution of Funds: Once assets are sold and claims are validated, the liquidator distributes the available funds to creditors based on a predetermined order of priority. Secured creditors typically receive priority, followed by unsecured creditors and shareholders.
Final Accounts and Reports: The liquidator prepares a final account, known as the "account of the liquidation," detailing all financial transactions and distributions made during the liquidation process. A final report is also submitted to regulatory authorities.
Meeting of Creditors and Shareholders: A final meeting is typically held with creditors and shareholders to present the liquidator's final account, provide an overview of the liquidation process, and address any remaining questions.
Notification to Regulatory Authorities: The liquidator notifies relevant government agencies and authorities that the liquidation is nearing its conclusion. This includes notifying Companies House or equivalent regulatory bodies.
Dissolution and Removal: Once all assets have been realized, debts settled, and distributions made, the company is formally dissolved and removed from the official register maintained by regulatory authorities.
Final Reports and Compliance: The liquidator files final reports, accounts, and other required documents with regulatory authorities to ensure compliance with legal requirements.
Release and Discharge: After successfully completing all the necessary tasks and obtaining necessary approvals, the liquidator seeks discharge from their duties and responsibilities.

It's important to note that the exact process may vary based on the legal framework of the jurisdiction in which the liquidation is taking place. Additionally, the complexity of the case and the presence of any outstanding issues or disputes can influence the timeline for concluding the liquidation.

What the Advantages and Disadvantages of Creditors Voluntary Liquidation?

Advantages

Controlled Process: Directors initiate the CVL, maintaining control over the company's winding-down process and decisions.
Protection for Directors: Proactive action shows responsible management, potentially reducing personal liability for directors.
Structured Asset Liquidation: Orderly disposal of assets maximises returns for creditors and ensures fair distribution.
Creditor Satisfaction: CVL addresses creditor claims in an organised manner, fostering goodwill among stakeholders.
Stops Legal Actions: CVL can halt legal actions by creditors, offering the company a controlled environment to address financial issues.

Disadvantages

Potential Losses for Creditors: Creditors may not recover the full amount owed due to the distribution hierarchy and the company's financial situation.
Limited Influence: Creditors have limited control over the liquidation process compared to secured creditors in other insolvency procedures.
Uncertain Returns: The amount and timing of creditor payments may vary based on asset realisation and distribution priorities.
Employee Claims Priority: Employees' claims for unpaid wages and redundancy pay take precedence, affecting available funds for other creditors.

What’s the job of a Liquidator in a CVL?

In a Creditors' Voluntary Liquidation (CVL), a liquidator is responsible for overseeing the systematic closure of a company's operations. Appointed by the company's directors and shareholders and ratified by Creditors, the liquidator manages asset realisation, validates creditor claims, communicates with stakeholders, investigates financial affairs, and organises meetings.

They ensure that the process is conducted transparently, following legal guidelines, and maximises returns for creditors. The liquidator's role encompasses reporting, distributing funds, assisting with employee claims, and ultimately concluding the liquidation process through the company's dissolution.

How Long does a Creditors Voluntary Liquidation Take?

The duration of a Creditors' Voluntary Liquidation (CVL) varies based on factors like the company's complexity, creditor claims, asset realisation, and legal procedures. Typically, the process lasts around 6 months to a few years.

It involves initiating the CVL, realising and distributing assets, validating creditor and employee claims, and completing legal formalities for the company's dissolution.

The specific timeline is influenced by case specifics and market conditions. Consulting an insolvency practitioner can provide a more accurate estimate based on your company's circumstances.

How Much Does it Cost?

At Cornerstone Business Recovery, we understand that transparency is essential when it comes to the financial aspects of a Creditors' Voluntary Liquidation (CVL). The cost of a CVL can vary significantly depending on factors such as the company's size, complexity, and financial situation. On average, CVL fees can range from approximately £5,000 to £15,000 or more.

However, these figures are approximate and subject to change based on specific circumstances. Our dedicated team of licensed insolvency practitioners is committed to providing you with a detailed breakdown of fees, expenses, and any potential additional costs associated with the CVL process. We believe in transparency and will work closely with you to ensure that you understand the fee structure and the value of the services we provide. Your financial well-being is our priority, and we're here to guide you every step of the way.

Can you Reverse a Creditors Voluntary Liquidation?

Reversing a Creditors' Voluntary Liquidation (CVL) is possible in exceptional circumstances but it's complex. It would ordinarily require a court order and there would need to be very strong grounds. The process requires legal and regulatory approvals and is more feasible if initiated early in the CVL.

Professional advice is crucial due to the intricate legal and financial considerations involved.

Can Directors be Held Personally Liable?

In a Creditors' Voluntary Liquidation (CVL), directors can potentially be held personally liable under certain circumstances. While a CVL is a formal process to wind down a company's affairs, directors still have legal obligations and responsibilities that they must adhere to. Here are a few key points regarding directors' potential personal liability in a CVL:

Wrongful Trading: If directors continue to trade and incur new debts when they know, or should have known, that the company is insolvent and unlikely to avoid liquidation, they can be held personally liable for the company's debts incurred during that period.
Fraudulent Trading: If directors engage in fraudulent activities, such as intentionally deceiving creditors or misrepresenting the company's financial position, they can be held personally liable for the fraudulent actions.
Preference Payments: If directors make payments or transfers that unfairly prioritise certain creditors over others shortly before the CVL, those payments can be deemed "preference" payments. Directors may be personally liable to contribute those amounts back to the company.
Unlawful Dividends: If directors authorise dividends to shareholders that exceed the company's available profits, they may be personally liable to repay those amounts to the company.
Misfeasance: If directors breach their fiduciary duties or act improperly during the company's insolvency, they can be held personally liable for any losses caused to the company or its creditors.
Negligence or Breach of Duty: Directors can be held personally liable if their actions or decisions demonstrate negligence, recklessness, or a breach of their duties of care and skill.

It's important to note that personal liability for directors in a CVL is not automatic and depends on the specific circumstances and the actions taken by the directors. Directors who act diligently, ethically, and in compliance with their legal duties can mitigate the risk of personal liability.

Consulting Cornerstone Business Recovery can provide guidance on directors' responsibilities and potential liabilities in a CVL.