A CVL is poles apart from a Compulsory Liquidation, where a company is forced to liquidate by a court.
Directors of an insolvent company may choose to pursue a CVL if the company’s shareholders 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 put in place to stop creditors from approaching the company with debt claims.
Shareholders must vote to approve the process. Following this, the firm will cease trading and sell off its assets.
A CVL is an option for companies that are struggling to cope with the stress and pressure of creditors who need to be repaid.
It is both professional and voluntary, providing the company directors with a greater variety of options than if they were entering compulsory liquidation.
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 board meeting to decide whether a CVL is the right choice for the company.
If the majority of the board is in agreement, the company will usually cease trading to avoid incurring any further debt or putting the directors at risk of being held liable for wrongful trading. The directors will also agree to call a shareholders’ meeting so that the shareholders can vote on placing the company into liquidation.
The directors will formally instruct a licensed insolvency practitioner to oversee the liquidation and begin the process. They will then give notice to creditors and shareholders of the decision date (the effective date of liquidation) and an upcoming general meeting, respectively.
With the insolvency practitioner’s assistance, the directors will prepare a Statement of Affairs. This is a document that contains details of the company’s financial position, providing estimates of the realisable value of the company’s assets and the amount it owes to creditors. They will also prepare a directors’ report detailing the company’s trading history, the financial affairs of the company and the events leading to the company’s insolvency. This information is sent to creditors ahead of a creditors’ decision procedure.
The directors must provide shareholders with an opportunity to pass a resolution to put the company into liquidation. This can be done either by correspondence or via a meeting. The shareholders are usually provided with 14 days’ clear notice, unless the articles of the company dictate otherwise.
If the company has two or more shareholders, at least two must be present at the meeting to pass a valid winding-up resolution. If 75% of shareholders (by value of shares) agree to the winding-up resolution, then the company is placed into the liquidation process with immediate effect.
Usually, a creditors’ decision procedure is held the same day as the shareholders’ meeting. Creditors must be provided with at least three business days’ notice of the decision procedure and, if it is a virtual meeting of creditors, it should be advertised in the London Gazette. This decision procedure allows creditors to vote on the appointment of a liquidator. Creditors cannot, however, stop the company from entering liquidation.
In most instances, the insolvency practitioner will be present at the meetings of both creditors and shareholders, to assist with the process and deal with any queries that are raised.
Directors and shareholders can make an offer to purchase the company assets from the liquidator if they wish to.
Most employees who are made redundant will receive any outstanding wages, holiday pay, notice pay and redundancy pay from the Redundancy Payments Service in accordance with the relevant legislation.
The liquidator is the insolvency practitioner overseeing the liquidation process. They will deal with any employee claims, keep creditors updated and take the necessary actions to realise company assets so that the proceeds can be distributed to fulfil any debts, where possible.
They are also required to carry out investigations on the directors (and any former directors within the previous three years) and the company’s affairs. They will then report their findings back to the Insolvency Service to conclude proceedings.
A CVL can allow a company to resolve financial worries in a structured, professional and effective way.
To enter into a CVL, a company must have the guidance of a licensed insolvency practitioner. Your insolvency practitioner will give you the expert advice you need to navigate the process, and it’s best to speak to one as soon as you notice signs of insolvency.This is where we can help.
With assistance from Hudson Weir, a CVL can relieve intense creditor pressure and help you find your way out of company distress. Our London based team has the expertise and experience to find the right solution for your specific circumstances, and will be by your side every step of the way.
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
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