What Are the Consequences of Creditors’ Voluntary Liquidations for Directors?

November 10, 2022 / CVL

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 a decline in profitability. Other times, companies will be saddled with large amounts of debt and lacking the income to make repayments, leaving a Creditors’ Voluntary Liquidation (CVL) as one of the only feasible options available.

CVL’s 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 a compulsory liquidation if its debt issues are not resolved in a timely manner. It is crucial to know what the consequences of CVL’s are 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.

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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 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 will 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 CVL’s for directors

While the CVL procedure can be an excellent tool for directors, it is important that you know the potential consequences before you start the process of putting your company into liquidation.

Investigation for misconduct

As part of the CVL process, an investigation into the conduct of directors and the history of the company is undertaken. This investigation will be carried out by the appointed insolvency practitioner. It 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 wrongdoings, this could lead to a more thorough investigation by the Insolvency Service.

Personal financial liability

If evidence of wrongful trading is found, this can result in serious consequences for the guilty directors. Including having their license disqualified for up to 15 years. This will bar them from holding management positions in any company, not just ones they own.

In addition to this, directors may face fines, personal liability for company debt and even a prison sentence, in the worst case.

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 would usually be responsible for making out statutory payments to redundant employees, it is not often that an insolvent company can do so. In such cases, employees can make their claim to the National Insurance Fund (NIF). The NIF will pay eligible employees up to £571 in redundancy pay, including directors that have worked in an employee capacity.

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 28 years of experience in helping the directors of struggling companies to find a solution to their problems. We can do the same for you.

For a free, no-obligation consultation, contact our team today.