Creditors Voluntary Liquidation (CVL)
Directors of the insolvent company may choose the option of a CVL if the company is insolvent and the shareholders of the company agree it’s the right decision. When cash flow is poor and creditors are owed unpayable debts, a CVL might be the best choice.
A CVL is an option for companies struggling to cope with the stress and pressure of creditors who need repayments. With a CVL, creditors can submit their claims in an orderly way and the process becomes controlled and manageable.
Creditor’s voluntary liquidation is the formal insolvency procedure used to close a company that has reached a position of insolvency. It may be used as a business rescue procedure by giving the directors the opportunity to purchase the business assets and goodwill at market value to trade from a new company, shareholders agreement.
Voluntary liquidation gives the director more control over the appointment of the liquidator than if the company were to be wound-up via the court.
1. Firstly, the company directors will hold a meeting to vote for whether or not a CVL is the right choice.
If agreed, assets will be safeguarded by a proposed liquidator (an insolvency practitioner – for example an accountant or a solicitor who is licensed in insolvency) and the firm will cease trading to avoid any further debt and wrongful trading.
2. A Declaration of Solvency document is then drawn no more than five weeks prior to the Liquidation.
This document lists the company’s assets and liabilities to show that the company can repay its debts within a 12-month period. It is lodged with the Registrar of Companies.
After this, meetings with company shareholders and creditors will be arranged.
3. Directors should draw up a Statement of Affairs document for both meetings, detailing the financial situation and how it came about.
The Statement of Affairs must also state company assets and their monetary value. The insolvency practitioner will also be present at both the shareholder and creditor meetings to assist the directors.
4. Shareholders must have 14 days notice of their meeting and during it they must vote to give their approval of a CVL being the best option.
If the company has two or more shareholders, at least two must be present. If 75% of shareholders (by value of shares) agree to pass a ‘winding-up resolution’ then the CVL will go ahead.
5. Following this, directors must hold the creditors’ meeting. This usually takes place on the same day as the shareholders’ meeting.
Creditors must have at least seven days’ notice and it must also be advertised in The London Gazette seven days prior to it taking place.
The Statement of Affairs will then be read out and creditors will vote to appoint an official company liquidator.
6. Directors and company shareholders can purchase the company assets back via the proposed liquidator and trade once more, giving directors a clean break.
All employees who are made redundant will receive redundancy payments from the Redundancy Payments Office in accordance with the law.