Is a Creditors’ Voluntary Liquidation right for my business?

creditors voluntary liquidation advantages and disadvantagesIf you are a company director you maybe wondering what the advantages and disadvantages of Creditors’ Voluntary Liquidation are?

A Creditors Voluntary Liquidation happens when shareholders and directors agree to place the business into liquidation because it can no longer pay its bills when they fall due.

This is the most common form of liquidation in the UK. All trading will cease and company assets are sold in order to repay creditors.

Secured creditors with a fixed charge generally take preference, followed by insolvency practitioner fees and then ‘ordinary’ creditors or secured creditors with a floating rather than a fixed charge

When a company is insolvent and has no hope of recovering, the process offers advantages to directors and creditors. But there are also a number of disadvantages to be aware of when entering a CVL.

So let’s look in more detail at the advantages and disadvantages of this process

Liquidation is the process of selling off all of a company’s assets in order to pay back creditors. While this may seem like a straightforward process, there are actually a number of potential advantages and disadvantages to consider.

One of the biggest advantages of liquidation is that it allows a company to quickly and cleanly pay off its debts. This can be especially beneficial if the company is facing severe financial hardship and is unlikely to be able to repay its debts in full.

Additionally, liquidation can also help to improve a company’s credit rating, making it easier to obtain future financing. However, there are also a number of downsides to liquidation.

First, it will typically result in the loss of all jobs at the company. Additionally, creditors may still have legal claims against the individuals involved with the company, which can lead to personal financial problems.

Finally, liquidating a company can be an extremely complex and time-consuming process. For these reasons, it is important to carefully weigh the pros and cons before deciding whether or not to pursue liquidation.

Advantages of a Creditors’ Voluntary Liquidation

Control over timings

The decision to commence a Creditors’ Voluntary Liquidation must be made via a resolution of the board of directors, then ratified by a resolution of the shareholders. This means that as the director of the company being put into liquidation, you will have control over the timing of when the liquidation process commences.

Control over the timing means more time to prepare the company for the liquidation.  This is a distinct advantage when compared with compulsory liquidation, where the company’s creditors force the company into liquidation, and the directors have no control over timing.

Outstanding debts are written off

Being unable to repay existing debts with no way of turning the company around is a stressful situation for any director. You cannot continue to trade if you are insolvent, and a CVL offers a way of dealing with these outstanding obligations in a way which aims to maximise returns for creditors.

Unless personal guarantees have been given for company debts, as a director you have no legal liability to repay monies owed by the business. Upon the company entering liquidation, any personal guarantees which have been given will crystallise and the responsibility for paying these associated borrowings will belong to the director/guarantor.

Legal action is stopped

If there is any any legal action taking place against the company is stopped when the company is in liquidation. This is unless as a director has no personal liability for a company debt, creditors will be unable to take action against you.

Liquidator deals with creditors

Once the liquidator has been appointed, the company’s creditors will need to communicate with them and not with you as a director. This can be a huge relief in situations where you are receiving threatening calls and letters on a frequent basis from creditors demanding to be paid because the company is insolvent and the company can’t pay its outstanding debts. The liquidator also has to pay the creditors in a predetermined order of priority, so there is very little room for creditors to claim they have not received their allotted share of the liquidation proceeds.

Staff can claim redundancy pay

Members of staff will be made redundant by the liquidator, and if eligible, they can start their claim for redundancy pay and other statutory entitlements. If monies realised from the sale of company assets are not sufficient to cover redundancy payments, staff have an alternative route by which to claim what is owed. The National Insurance Fund pays out for redundancy, unpaid wages and holiday pay should the company not be able to do so using its own funds

Potential for directors to claim to redundancy

It’s relatively unknown that directors can claim redundancy pay on the liquidation of their company in some cases. If a director has worked as an employee for the company for at least two years, received a salary under PAYE, and worked a minimum of 16 hours per week in a practical rather than an advisory role, they may be able to claim the same statutory entitlements as member of staff.

It shows that directors are fulfilling their legal obligations

Under UK insolvency law directors are legally obliged to be aware of their company’s financial position at all times. By entering into voluntary insolvent liquidation they prove that this is the case and can limit creditor losses as well as their own reputational damage.

Leases can be cancelled

Lease and hire purchase agreements are generally terminated at the date of liquidation, meaning that no further payments need to be made. If any arrears are owed, the company leasing the goods the lender may be able to claim from the insolvency practitioners along with other creditors. If a personal guarantee has been offered upon signing a property lease agreement; you should check your documentation carefully so you know whether you are likely to be made personally responsible for the remainder of the lease. 

Disadvantages of a Creditors’ Voluntary Liquidation

Company Will be Closed

A Creditors’ Voluntary Liquidation is a procedure which will end with the company’s assets having been sold off and the company itself wound up. This cannot be undone. You will not be able to start a company with the same name unless you seek advice and follow a prescribed process. Unless you do this, if you decide to start another company in the same field, any goodwill that has been built up in the company’s brand name will be lost.

Accusations of wrongful trading

On liquidation, the appointed insolvency practitioner is obliged to investigate the conduct of all directors. A detailed report is sent to the Department for Business, Innovation & Skills (BIS), and if a case is successfully brought against one or more directors, they could face severe penalties. These include a ban from acting as a director for up to 15 years, and in serious cases prosecution through the courts and a prison sentence may ensue. 

Staff redundancies

Unfortunately, all staff are made redundant when a company enters Creditors’ Voluntary Liquidation. If the company is unable to make the required redundancy payments, which is often the case with insolvent liquidations, employees can make a claim from the National Insurance Fund (NIF).

Personal guarantees will kick in

If directors have provided personal guarantees for any of the company’s borrowing, lenders will expect repayment according to the terms and conditions of the loan. This could place directors’ personal finances at risk – if they can’t pay, lenders will pursue them through the courts.

Public process

It’s a requirement of a CVL that the creditors’ meeting has to be advertised in The Gazette, which means it is publicly reported and is on the public record. There’s no way to avoid this requirement. This can damage a director’s business reputation in some cases, although less so when compared with compulsory liquidation as the directors have placed creditor interests first.

No Returns for Shareholders

As the company is insolvent, it’s highly unlikely that there will be any returns for the company’s shareholders from the liquidation. Any proceeds realised from the liquidation are likely to be swallowed up paying the liquidator and the creditors.

Liability for overdrawn directors’ current accounts

Each director will be held responsible for repayment of their own director’s account should it be overdrawn. The liquidator has the power to force directors to repay this debt if necessary.

Benefits to creditors

  • You can move forward without having to waste time chasing for money and will get as much as they can afford towards the debt
  • Involved in the liquidator’s appointment and have a say in whether the CVL goes forward along with other creditors
  • You can be assured that the directors’ conduct will be formally investigated
  • You can reclaim VAT

One mistake many businesses make is to wait too long before speaking to an insolvency practitioner, we speak to you directly and put business recovery at the forefront of our priorities. If you talk to us before things get unmanageable then a CVL may not be your only option and we can work out what is best for you and your company.

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