What is Creditors Voluntary Liquidation (CVL)?
Posted on 26th October 2021 at 15:52
Following a period of financial hardship and various efforts made to turn the fortune of a company around, company directors might consider the possibility of a formal insolvency solution like a CVL. This stands for Creditors Voluntary Liquidation and involves the company directors choosing to bring the company to an end.
No company director wants to see their company go out of business, but in some cases, the future of the business as a viable entity has been fully exhausted. Under these circumstances, a CVL becomes the best solution for all parties going forward. Read on for more information on how a CVL works.
Insolvency and Responsibilities
There are two tests to see whether your company is insolvent or not, the first is the Cash Flow Test, and the second is The Balance Sheet Test. Cash-flow insolvency is when a company cannot meet its financial obligations when they are due, and Balance Sheet insolvency is when the company's liabilities outweigh its assets.
If your company is insolvent or at risk of insolvency there should be no attempts made to obtain further loans. Moreover, any loans you do have should be paid back, if possible, based on sufficient funds in your accounts. Failing that, insolvency is the only alternative and you need to speak to insolvency practitioners.
Can a CVL help?
If your company is struggling and in danger of insolvency there are options such as administration and CVAs. These attempt to turn around the fortunes of a struggling company and rescue it. But in some cases saving the company will not be possible and there will be no other option but to wind it up via liquidation.
A CVL will bring the company to a close and settle any debts it has. Since this is a liquidation procedure there will be an attempt to recover as much as possible to repay creditors, that said, creditors, will expect to write-off money where there is a shortfall. A CVL is not to be confused with a Personal Guarantee (PG) that will not be written off following liquidation.
Placing a company into CVL
It is not possible to enter your company into a CVL yourself, even if you are the company director or main shareholder. You will first have to contact a licensed insolvency practitioner who will give you sound practical advice and guidance to proceed with the CVL. The company directors and shareholders will have to agree to a CVL.
Before you enter into a CVL you would be advised to consult with an insolvency expert to see if there are other viable solutions. Usually, there is the possibility of rescue, recovery, or restructuring via administration or a CVA. But if this is not an option or if the company directors wish to liquidate, a CVL is the only option.
Meeting of the board
Following the advice of a licensed insolvency practitioner, the director must assemble the board of directors to agree a consensus on the insolvency motion. In the case of a sole director, the shareholders should be convened for the same purpose and agree on a date for when the company can be placed into insolvency.
At this point, the board of directors or the sole director must appoint a licensed insolvency practitioner to oversee the insolvency process. They should also draw up the relevant documentation to commence the process of insolvency.
Notice to shareholders and creditors
Once the decision has been taken to commence with liquidation and a licensed insolvency practitioner has been appointed, shareholders and creditors will be notified officially. Prior to the Decision Date – the date when liquidation will start to take effect – the creditors and shareholders will be presented with a statement of Company Affairs.
The Statement of Affairs of the Company is a document that outlines the financial position of the company including all of its assets and liabilities. The document also sets out the value of the company and its deficiency to creditors. The document is also sent out to creditors.
On the day of the general meeting of shareholders s decision date of creditors will also be established. These events usually take place on the same day. For the company to enter liquidation 75% of shareholders at a minimum must resolve to enter the company into liquidation.
A physical creditors meeting will only be required if it is requested by 10% of the creditors in value, 10% of creditors in number, or 10 creditors in total. If there are no requests for such a meeting, the liquidation process can commence. Liquidation will start at 23:59 on the Decision Date.
The role of insolvency practitioners during a CVL is to meet with creditors to resolve issues relating to creditors claims and take actions to release company assets to raise outstanding funds owed to creditors. The assets will be valued independently and sold appropriately. It is possible for directors of the company to buy liquefied assets at market price.
The insolvency practitioner is also responsible for collecting outstanding book debts and handling employee claims. The process for liquidation of company assets under a CVL is linear and set out clearly in the Insolvency Act 1986. Secured competitors are the first to be allocated liquefied funds filled by preferential creditors.
After a CVL
Following the completion of a CVL the liquidated company will be taken off the register held at Companies House. The business will no longer exist. If there are any liabilities that remain unpaid by the company they will be written off unless they were Personally Guaranteed. Personally Guaranteed funds will remain active.
There may be some other legal details to tie up following the CVL, these can include the results of investigations made into directors during the liquidation process. Company directors who were found to have breached the conduct codes on trading and fiduciary duties during the insolvency process may be disqualified from acting as the company director for a period of up to 15 years.
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