For many companies, liquidation will be considered at some point. This could be for a wide range of reasons, from Directors changing their priorities to declining profitability. Other times, companies will be saddled with large amounts of debt and lacking the income to repay, leaving a Creditors’ Voluntary Liquidation (CVL) as one of the only feasible options.
CVLs can be incredibly effective at helping Directors with their company’s financial problems. However, failure to use the procedure properly can cause more trouble down the line. Directors can be held accountable for improper execution of the process, and in some cases, your company can be forced into compulsory liquidation if its debt issues are not resolved in a timely manner. It is crucial to know the consequences of CVLs for Company Directors to ensure a favourable outcome.
In this article, Clarke Bell will discuss exactly that, breaking down the CVL procedure and the implications it has for Directors.
What is a Creditors’ Voluntary Liquidation?
A Creditors’ Voluntary Liquidation (CVL) is a formal insolvency procedure for companies that cannot repay their liabilities within twelve months. It is a voluntary process, initiated by the company’s Directors. The Directors appoint a licensed insolvency practitioner of their choice. The chosen insolvency practitioner will then be responsible for carrying out the CVL procedure, ensuring it is within the confines of the law.
After their appointment, your insolvency practitioner will liquidate any of your company’s assets and distribute any proceeds amongst your company’s outstanding creditors. After the disposal of these assets, your company will be wound up and cease to exist.
Closing your insolvent company through a CVL has many advantages:
- If you follow the procedure correctly, you will avoid performing any accidental misconduct and the consequences that follow
- You will prevent your company from being forced into compulsory liquidation, which can bring detrimental consequences to Company Directors.
- Your company will have legal protection once the procedure begins. This means that outstanding creditors cannot petition for your company to be placed into compulsory liquidation or take other legal action. Even if it would otherwise be accepted
- If your company still has outstanding debt at the end of the procedure but doesn’t have the money to repay it, the remaining debt will be written off. The exceptions to this are in the event of Director misconduct that resulted in the company’s inability to repay. Or if a personal guarantee has been signed as part of a loan agreement. Both scenarios usually result in Directors assuming liability for the debt and being forced to pay out of their personal finances.
If you would like to know more about Creditors’ Voluntary Liquidations, read our complete guide to the process.
Possible consequences of CVLs for Directors
While the CVL procedure can be an excellent tool for Directors, it is important to know the potential consequences before you start the process of putting your company into liquidation.
Investigation of misconduct
As part of the CVL process, the appointed insolvency practitioner will investigate the conduct of Directors and the company’s history. This investigation will check whether Directors have been acting in the best interests of the company and its creditors.
For most Directors, this investigation will be a formality. However, if there are any suspicions of wrongdoing, this could lead to a more thorough investigation by the Insolvency Service.
Personal financial liability
Evidence of wrongful trading can result in serious consequences for the guilty Directors, including being disqualified for up to 15 years. This will bar them from holding management positions in any company, not just ones they own. In addition, Directors may face fines, personal liability for company debt, and even a prison sentence in the worst case.
Reputation management after a CVL
While Creditors’ Voluntary Liquidations are a legitimate business decision, they can still have some impact on your professional reputation. However, it’s important to note that choosing a CVL is far better for your reputation than allowing your company to be forced into compulsory liquidation.
Being proactive shows that you are taking responsibility, which can reassure future partners or investors. Maintaining transparency, cooperating fully with the liquidation process, and documenting responsible conduct can further help preserve your professional standing.
Regulatory oversight can persist
Directors may remain under regulatory scrutiny even after liquidation, especially if their industry is tightly monitored. Financial conduct authorities, professional associations, or sector regulators may assess whether the Director’s behaviour breached professional standards, potentially resulting in sanctions or loss of licensure.
Issues getting a mortgage
In some cases, Directors who undergo a CVL may experience difficulties obtaining personal credit, including mortgages. While a CVL doesn’t directly impact a Director’s credit report, any personal guarantees called in and subsequent defaults could lower their credit score. Lenders may also view Directorship of an insolvent company as a red flag, depending on the circumstances.
Handling personal guarantees and debt
If you’ve signed a personal guarantee, the lender can pursue you personally once the business defaults. This can lead to court claims, damage to your credit rating, and enforcement actions such as charging orders or wage garnishments. It’s vital to review all company credit agreements to understand your exposure.
Director redundancy
As a Director of an insolvent company, you could be entitled to redundancy if your company enters into a CVL. Employees must be made redundant as part of any liquidation process, entitling them to certain statutory payments. If you have worked in an employee capacity for your company, you would be entitled to the same statutory payments as any other employee.
Although a company is usually responsible for making its statutory payments to redundant employees, an insolvent company is not often able to do so. In such cases, employees can make their claim to the National Insurance Fund (NIF).
Impact on business operations
When a company enters a CVL, Directors lose control of the business. From the point of liquidation, the insolvency practitioner assumes full authority over the company’s affairs. Directors must cooperate with the liquidator and are legally obliged to provide all company records, financial information, and assistance during the process. This shift in control can feel abrupt, especially for those who have built their business from the ground up. Failure to comply with the liquidator’s request can result in legal repercussions, including fines or further investigations.
Understanding Director disqualification risks
If the insolvency practitioner finds that the Directors acted improperly, such as incurring debts with no reasonable prospect of repayment or failing to act in the creditors’ best interests, they may refer the case to the Insolvency Service. This can lead to a Director disqualification order, preventing the individual from serving as a company Director for up to 15 years.
Can a Director start a new business after a CVL?
Directors are generally allowed to start a new business after a CVL. However, there are strict legal restrictions if they intend to reuse the same or a similar company name. Failing to adhere to these restrictions could result in personal liability for the new company’s debts and even criminal charges.
Under Section 216 of the Insolvency Act 1986, Directors of a liquidated company cannot use a name identical or similar to the old company for five years unless they meet specific criteria. This includes seeking court permission or acquiring the name from an insolvency practitioner under prescribed circumstances. Ignoring these rules can result in prosecution and personal liability for the debts of the new company.
What are the criteria for claiming redundancy as a Director?
To claim redundancy, Directors must meet certain criteria: they must have worked for the company for at least two years under a contract of employment, take a regular salary through PAYE, and have carried out more than just statutory duties. This means Directors should have played a day-to-day role in the business, such as handling sales, managing staff, or overseeing operations.
This employment must be demonstrable through written contracts, wage slips, and evidence of regular, ongoing involvement in company activities. It’s also important that the role was consistent and not merely performed to gain eligibility for a claim. If these conditions are met, Directors can claim redundancy pay, holiday pay, notice pay, and unpaid wages from the Redundancy Payments Service.
Clarke Bell can help you
Being the Director of a company facing insolvency is stressful. If you are in this situation, Clarke Bell can help you.
We have more than 30 years of experience in helping the Directors of struggling companies find a solution to their problems. We can do the same for you. For a free, no-obligation consultation, contact our team today.
