The decision to liquidate an insolvent company is always a difficult one to make; however, as is the case with many aspects of running a business, it is important to act quickly and decisively. Taking the initiative to liquidate the company will release the company assets and settle company debts before the possibility of a winding up order becomes a reality. If a company is experiencing financial difficulties and facing insolvency, then a Creditors Voluntary Liquidation is often the most appropriate way of winding down a company. Read on to explore the CVL process and how it affects directors.
What is Creditors Voluntary Liquidation
A Creditors Voluntary Liquidation, also referred to as a CVL, is an insolvency practice which formally brings an insolvent business to an end. When a company’s liabilities exceed their assets, the cash flow cannot meet liabilities, and the balance sheet is outweighed, then a CVL ensures that the company assets can be used to resolve all debts and liabilities.
Creditors Voluntary Liquidation is a voluntary process that is started by the company directors or shareholders to voluntarily liquidate the business; however, it is most often entered into after many months of financial struggles and when it has been made clear that the business cannot continue to remain viable. A voluntary approach to liquidation reduces the risk of the business being taken to court over unpaid company debts, as well as reducing the strain on the business to pay off creditors, as a licensed insolvency practitioner will be appointed to wind up the company and oversee the payments.
What happens to directors in a creditors voluntary liquidation?
Once the CVL process has started, the licenced insolvency practitioner will take over responsibility for the company affairs and act as a liquidation. However, entering into a Creditors’ Voluntary Liquidation does not automatically absolve the director of responsibility. As a director-led liquidation, the director is responsible for starting the liquidation process and there are several procedures that they must follow, as well as several considerations to keep in mind when considering a CVL.
Notifying Creditors
Once a licenced insolvency practitioner has been appointed and the voluntary liquidation process has begun, it is the responsibility of the director to notify the company’s creditors of this. The creditors then have the opportunity to appoint a different liquidator if they are unhappy with the proposed insolvency practitioner.
Statement of Affairs
As well as providing ample notice of their intentions to place the company into a Creditor’s Voluntary Liquidation, it is also the directors responsibility to provide creditors with a statement of affairs. This is a document put together by the insolvency practitioner detailing the financial situation of the company, as well as explaining the reasons for the insolvency. Communications between the director and creditors should always emphasise that the CVL process was entered into to protect the best interests of the creditors and to ensure that the company could meet its obligations before being wound down.
Personal Liability
In order for a company to become insolvent, the liabilities must be in excess of the remaining assets, meaning that creditors cannot be paid in full or bills met on time. The company is then liquidated to release and distribute the company’s assets, first to creditors, then to shareholders. If this process is not started at the appropriate time and creditors are not paid the money owed to them, then the creditors can petition the Court for a winding up order against the company. In this situation, the company directors are made personally liable for company debts, so entering into a Creditor’s Voluntary Liquidation is often in the best interests of the company and the director to avoid further personal liability during an already stressful and unfortunate time.
CVL Specialists
If you are the director or shareholder of a company that is struggling to pay creditors or is experiencing financial difficulties, then speaking to an insolvency practitioner about an Creditors Voluntary Liquidation will be in your best interests. A CVL is the best step to take to ensure creditors are paid before a compulsory liquidation is unavoidable and you become personally liable for outstanding debts.
BEACON are specialists in business insolvency solutions. As well as finding the right options for your business going forward, BEACON will also be able to guide you through the process of liquidation. Click here to learn more about their company insolvency solutions.