Complete Guide to Creditors’ Voluntary Liquidation

December 8, 2021 / CVL

A Creditors’ Voluntary Liquidation (CVL) allows a company director(s) to close their insolvent business when it is no longer feasible, whether this is because it can’t pay its bills and debts or its liabilities outweigh its assets.

Initiated by the director(s), this is a process that stops the company trading and liquidates its assets in order to pay back its creditors.

If your limited company is insolvent, it is best to take control and apply for a Creditors’ Voluntary Liquidation before you are forced into a Compulsory Liquidation.

To help you kick start the process and establish whether this is the right option for you, Clarke bell has put together this comprehensive guide on everything you should know about Creditors’ Voluntary Liquidation.

What is Creditors’ Voluntary Liquidation? 

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Let’s start with the basics, what exactly is a Creditors’ Voluntary Liquidation?

A Creditors’ Voluntary Liquidation is a formal insolvency process that liquidates your company, meaning it ceases to trade and operate. Following this, it is formally dissolved and struck off the Companies House Registrar.

As a formal process, it is legally required to be carried out by a licensed Insolvency Practitioner.

The main difference between this and Compulsory Liquidation is that a Creditors’ Voluntary Liquidation is applied for voluntarily by the company directors and shareholders. On the other hand, a Compulsory liquidation is forced on a company by creditors who issue a winding-up petition if your company owes them over £750 and their payment demand has gone unfulfilled.

Although this is a process that is kick-started by the company director(s), for a Creditors’ Voluntary Liquidation to be carried out, at least 75% of the company’s shareholders must agree to initiate the process.

A company director can only apply for Creditors’ Voluntary Liquidation is their company is insolvent.

There is also a third option – Members’ Voluntary Liquidation. An MVL is process that liquidates a solvent company and is typically considered a tax-efficient way of closing a business.

Main Advantages of a Creditors’ Voluntary Liquidation (CVL):

  • You are taking control of a difficult situation – rather than living in fear of things happening to you
  • You are acknowledging your legal duties as a director to your creditors – e.g. avoiding a risk of “wrongful trading”
  • You get to appoint the Insolvency Practitioner (IP) who you want to do the liquidation – so you are able to influence things like what date to have your statutory meetings
  • The whole process can be done from the comfort of your own office (assuming you appoint an IP who has the facility for on-line meetings)
  • You can appoint a RICS valuer to give you a professional and independent value of the assets of the business. These can then be purchased from the liquidator if you wish to restart. And, because you have employed independent professionals, you cannot be accused of committing a transaction at an undervalue
  • It is a cost-effective way of formally shutting down a business to ensure that nothing can come back to “haunt you” – e.g. any unknown bills due to the Revenue dating back several years

When is a company deemed insolvent?

A company can be classified as insolvent and go into liquidation when its assets are insufficient to pay its debts, bills and other liabilities.

There are two main tests to tell if a company is insolvent, these include:

  • The cash flow test: this determines whether a company can pay its bills and day to day costs. It is deemed insolvent if it can’t fulfil these commitments.
  • Balance sheet test: this determines whether your company has more assets or liabilities. If a company’s liabilities outweigh its assets then it can be deemed insolvent.

When should you consider Creditors’ Voluntary Liquidation?

If you pass these solvency tests, or the following are true, you should consider applying for Creditors’ Voluntary Liquidation:

  • Your business has run out of cash and can no longer pay its bills or debts
  • Your business no longer seems viable
  • Creditors are threatening you with a winding-up petition in order to retrieve money owed to them
  • You are concerned you will build up further debts

If this sounds familiar, a Creditors’ Voluntary Liquidation will allow you to close your company quickly and in a professional manner. This means that you can become a company director of another company in the future should you wish.

How to apply for a Creditors’ Voluntary Liquidation

The first step in applying for Creditors’ Voluntary Liquidation is to seek initial advice to ensure it’s the right path for you.

Here at Clarke Bell, we offer a free, completely confidential initial consultation where we talk through your situation to find the best solution to your problems.

Once you have decided that Creditors’ Voluntary Liquidation is the best route forward, the next step is to hold a meeting with your company’s shareholders. After all, 75% of shareholders must vote to pass the winding-up resolution before the liquidation can go ahead.

Having gained the agreement of the majority of your shareholders, the next step is to appoint an Insolvency Practitioner.

Appointing an insolvency practitioner

In the UK, you are legally required to appoint a Insolvency Practitioner to undergo the process of liquidating your company.

One of the advantages of choosing a Creditors’ Voluntary Liquidation is that, unlike in the case of a Compulsory Liquidation, you can choose which Insolvency Practitioner you appoint to take on your case.

Ultimately, the aim of the Insolvency Practitioner is to work with insolvent companies to get the best possible outcome under the circumstances.

When it comes to choosing a licensed Insolvency Practitioner to work with, it is important that you lookout for the following factors:

  • They are fully licensed and therefore permitted to take on your case
  • They have a proven track record of experience, including sector-specific experience in your industry
  • They are solid communicators and can clearly converse with the director(s), stakeholders and creditors to ensure everyone is informed and in agreement
  • They charge reasonable fees
  • They work for a trustworthy and reputable firm

Once you’ve appointed an Insolvency Practitioner to become the proposed liquidator, you will be asked to provide them with specific information as well as a list of the company’s creditors.

Once this has been provided, the Insolvency Practitioner will contact the creditors and be their main point of contact on your behalf. They will oversee and carry out the process of closing your business.

What are the creditor’s rights during a Creditors’ Voluntary Liquidation?

Although this is called a Creditors’ Voluntary Liquidation, a creditor cannot initiate the process.

However, the creditors do have certain rights throughout the process. For example, a creditor can view all creditors of the company as well as a summary of the Statement of Affairs. Creditors are also asked to vote to approve the Liquidator appointed. So, they are involved in the process which is worth considering.

Looking to take the next step with Creditors’ Voluntary Liquidation? Let Clarke Bell help

Now you know exactly what is involved in the process of a Creditors’ Voluntary Liquidation, Clarke Bell can help you take the next steps.

We have a friendly team of experienced licensed insolvency practitioners who can work closely with you to get to know your case and get you on the right path. With over 28 years’ experience, you can rest assured that we will find the best solution going forward, whether your case is simple or complex, all at an affordable price.