What is Creditors Voluntary Liquidation (CVL)?
If your company is struggling with unmanageable debt, constant creditor pressure, or the threat of a winding-up petition, a Creditors’ Voluntary Liquidation (CVL) is often the most professional and effective way to close the business.
By choosing a CVL, you are demonstrating that you are fulfilling your legal obligations as a director. This proactive approach helps protect you from potential accusations of wrongful trading and stops the stress of mounting legal letters and bailiff visits.
Is My Company Legally Insolvent?
Before proceeding with a CVL, it is essential to determine if the company is technically insolvent.
- The Cash Flow Test: This asks whether the company can pay its debts, such as wages, rent, or supplier invoices, as they fall due.
- The Balance Sheet Test: This asks whether the total value of the company’s assets is less than the total amount of its liabilities, including future and contingent debts.
- The Legal Action Test: Does the Company have outstanding CCJs, an unpaid statutory demand, or winding up petition issued against it
If your company fails these tests, the company is insolvent. At this stage, your primary legal duty shifts from the shareholders to the creditors. Continuing to trade while knowing the company cannot pay its debts can potentially lead to personal liability.
The CVL Process: Step-by-Step
At Liquidate My Company, we aim to make the liquidation journey as transparent as possible. Here is how the procedure typically unfolds:
- Initial Consultation and Advice
The process begins with a meeting with a licensed Insolvency Practitioner (IP). We review your financial situation, assess the company’s assets, and confirm that a CVL is the most appropriate course of action for your specific circumstances.
- Board Resolution
The directors must hold a formal board meeting to resolve that the company is insolvent and should be placed into liquidation. At this point, you officially instruct the IP to assist in the process and begin preparing the Statement of Affairs, which is a document summarizing the company’s financial position. We provide the appropriate documentation for you to sign.
- Shareholder and Creditor Approval
Shareholders are required to pass a special resolution to wind up the company, which needs a 75% majority by value of shares. Following this, creditors are notified. Most liquidations use the “deemed consent” procedure, meaning a physical meeting is only held if a significant percentage of creditors specifically request one. This makes the process much faster and more cost-effective.
- The Appointment of the Liquidator
Once the resolutions are passed, the IP is formally appointed as the Liquidator. At this moment, the directors’ powers to manage the company cease. The Liquidator takes control of all company records and begins the task of realizing assets, which might include selling machinery, stock, or collecting outstanding book debts.
- Final Dissolution
After the Liquidator has investigated the company’s affairs and distributed any available funds to creditors in the legal order of priority, they will file a final report. Following the filing of the report the Company is struck off the register at Companies House and ceases to exist as a legal entity.
Director Risks and Personal Liability
One of the biggest concerns for directors is whether they will be held personally responsible for the company’s debts. While the limited liability status of a company generally protects individuals, there are several areas where you may remain exposed:
- Personal Guarantees: If you have signed a personal guarantee for a business loan, overdraft, or commercial lease, the creditor can pursue you personally if the company cannot pay. A CVL does not cancel these guarantees, but it does ensure that assets are handled correctly to minimize the remaining balance.
- Overdrawn Director’s Loan Accounts: If you have withdrawn money from the business that has not been classified as salary or dividends, it is considered a loan. A Liquidator is legally required to recover these funds from you to pay creditors.
- Wrongful Trading: If it can be proven that you continued to take on credit and trade while knowing there was no reasonable prospect of avoiding insolvent liquidation, you could be ordered to contribute personally to the company’s assets.
Dealing with HMRC and Other Creditors
In a CVL, the Liquidator handles all communication with creditors, including HMRC. This removes the burden from the directors. HMRC is classified as a secondary preferential creditor for certain taxes like VAT and PAYE, meaning they are paid ahead of unsecured trade creditors. If the company has no assets to pay these taxes, the debt is typically written off upon dissolution, provided there has been no fraud or misfeasance.
Banks and other secured creditors usually hold a debenture. We work closely with these institutions to ensure that any security they hold is handled professionally, which can often help in negotiating any personal guarantee settlements later on.
Employee Rights and Redundancy
When a company enters a CVL, all employment contracts are terminated. However, employees are protected by the National Insurance Fund. They can claim for unpaid wages, holiday pay, and statutory redundancy pay up to certain statutory parameters. Interestingly, directors who are also employees of the company (those with a contract of employment and who receive a regular salary through PAYE) may also be eligible to claim redundancy. For many directors, this claim can be a significant financial help during a difficult transition.
How Much Does a CVL Cost?
A Creditors’ Voluntary Liquidation involves significant statutory work, including advertising in the London Gazette, professional insurance, and detailed investigations.
In many cases, the cost is covered by the sale of the company’s own assets, such as vehicles, equipment, or cash in the bank. If the company has no assets at all, the directors usually choose to pay the fee personally to ensure the business is closed in a compliant manner, protecting their professional reputation and preventing further legal action from creditors.
Once we have discussed the Company’s affairs with you we will be able to provide details of the fee to be charged.
Conclusion: Moving Forward
Choosing to liquidate your company via a CVL is a difficult decision, but it is often the smartest way to deal with an impossible financial situation. It provides a clean break, stops creditor harassment, and allows you to move on to your next project without the weight of an insolvent business hanging over you.