It is poles apart from a Compulsory Liquidation where a company is forced to do so by the court.
Directors of the 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.
It is a director-led process where a moratorium, a period halting legal obligations, is emplaced to stop creditors from approaching the company with debt claims.
Shareholders must vote to approve of the process. Following this, the firm will cease trading and sell off its assets.
A CVL is an option for companies struggling to cope with the stress and pressure of creditors who need repayments.
It is both professional and voluntary, allowing more alternatives to the company directors than if it were a Compulsory Liquidation situation.
With a CVL, creditors can submit their claims in an orderly way and the process becomes controlled and manageable.
How does a Creditors’ Voluntary Liquidation work?
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.
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.
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.
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.
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.
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.
The liquidator appointed by the creditors will deal with employee claims and keep creditors updated, distributing company funds to fulfil these where possible.
They will realise company assets and carry out investigations on the directors and the company affairs to be reported back to the Insolvency Service to conclude proceedings.
A CVL is a professional solution for a failing company.
It gives directors control and allows matters to be dealt with in an orderly way alongside a licensed insolvency practitioner.
If you are thinking about a CVL, all you need to do is get in touch with Hudson Weir.
We can assist you with professional advice and find out whether this is the best decision for your business.
We will assess your situation and our skilled team will work alongside you to form an effective action plan.
A CVL is a big move but our team can help you figure out the next steps that are best for you.
Hudson Weir are an established firm of Insolvency Practitioners who specialise in business recovery and corporate financial solutions. Hudson Weir provides industry leading, nationwide services for its clients with the intention of easing financial pressures and providing recovery strategies for struggling businesses.More about us