What are the advantages and disadvantages of a Creditors Voluntary Liquidation (CVL)?
A Creditors’ Voluntary Liquidation (CVL) is a formal process used to close an insolvent company and is carried out by a licensed Insolvency Practitioner such as those at Wilson Field. The process has many benefits to directors, shareholders, and creditors – but it is important to understand the implications of the process.
Once a company enters liquidation, the process takes place to formally wind up the company, removing creditor pressure, preventing legal action, and clearing any unsecured debt.
Advantages of a Creditors’ Voluntary Liquidation (CVL)
Closing a company through a CVL has many advantages, including but not limited to:
- Close the company and walk away
Directors can propose the voluntary liquidation of an insolvent company and with 75% of the shareholders agreement, the company can enter into a CVL. The process will see the company formally wound up and the directors can walk away from the limited company.
- Continue to trade through a different company and purchase assets back
It is possible to liquidate a company and continue to trade the business through a newly registered or existing company. This is commonly known as a pre-pack liquidation.
These are some of the key differences when referring to a pre-pack liquidation which are agreed with the liquidator prior to a company entering CVL:
- Some or all of the insolvent company’s assets can be purchased and transferred.
- The business can continue uninterrupted.
- Employees have the possibility of being TUPE’d
Directors can purchase assets from the insolvent company through a CVL, whether for personal or company use. - Unsecured debts are written off
All unsecured debt is written off with the formal liquidation of the company. Allowing directors to move on without the burden of this debt.
- Hold position of director at other limited companies
A director can continue to, or become the director of other companies, after a company they have been director of has gone into liquidation.
- Legal action stops
Any current or future legal action taken against the company, such as County Court Judgements or Winding Up-Petitions, are stopped once the company enters CVL.
- Liquidators deal with creditors
Director responsibilities will cease and the insolvency practitioner will handle all communication with creditors, such as phone calls, letters and bailiffs. Removing the burden of any action taken against the company.
- Take control, avoid court processes and compulsory liquidation
Directors who choose to enter a CVL will have more control over the process and be able to appoint their own liquidator. By entering into a voluntary liquidation, the company avoids being wound-up by creditors and forcing the company into compulsory liquidation, with the Official Receiver taking control.
- Leases can be cancelled
Terms on leases and hire purchase agreements will be terminated, stopping any further payments. Any arrears owed, will be written off as the company is liquidated.
- Reduce wrongful trading accusations
Directors who decide to cease trading and enter into a CVL, are prioritising their creditors interest and will limit the risk of accusations of wrongful trading, when the liquidator investigates the company’s insolvency.
- Employee, director entitlements and redundancy pay
If eligible, employees and directors can apply for statutory entitlements, such as:
- Redundancy pay
- Holiday pay
- Outstanding payments such as:
- Unpaid wages
- Overtime and bonus/commission
- Statutory notice pay
- Directors fulfil legal obligations
Directors have a legal obligation to be aware of their company’s financial position at all times and to hold no creditor preferences. By entering into a CVL, this shows directors are prioritising creditors.
- Take control of the liquidation and choose a liquidator
A Creditors Voluntary Liquidation is an irreversible process, which cannot be undone or objected to by creditors. By choosing to voluntarily liquidate it enables directors to take more control and choose their own liquidator.
Disadvantages of a Creditors’ Voluntary Liquidation (CVL)
When considering a CVL, it is important to understand the implications, including but not limited to:
- Liable for overdrawn directors’ loan account
If a director has an overdrawn loan account, they may become liable for this when the company enters liquidation.
- Prohibited reuse of company name
If a director has been involved with a company 12 months prior to its liquidation, they are prohibited to use or be involved, in a company or business with the same or similar company name for a period of five years.
There are three exceptions that may allow you to reuse a company name:
- Applying to the court for reuse of the company name – this must be done within seven days from the date the company entered CVL.
- If parts or all of the business is purchased by the director from the liquidator, they may be able to reuse the company’s name.
- If a director is involved with a different or subsidiary company of the same or similar name to the liquidated company, for the whole of the 12 months prior to the date of its liquidation, they can continue being involved in these companies.
If you are considering a CVL and want to learn more about reusing a company name, our experienced advisors can provide free, confidential guidance. - Employees are made redundant
When a company enters a CVL, all employees will be made redundant.
However, if a new company is formed, employees may be TUPE’d over to the new company.Employees may be entitled to claim statutory entitlements, such as redundancy & holiday payments. - Personal guarantees
When a company enters into a CVL, if directors have provided personal guarantees for any of the company’s borrowing, lenders can expect repayment per the terms of the loan.
How we can help
Our licensed insolvency practitioners are qualified across all insolvency procedures, including a Creditors Voluntary Liquidation. Our experienced initial advisors can discuss your company, and assess the options available.
- Speak with our initial advisers via phone, filling in a form or online chat. If suitable, we will arrange a free consultation with one of our consultants to discuss your situation in depth.
- After an initial assessment, we will advise if the liquidation of your company is the most appropriate route forward, or if there are other avenues to explore.
- We will confirm the necessary steps to place the company into liquidation and would be engaged to carry out those steps on the director’s behalf.
In summary
A CVL is a process that must be carried out by a licensed insolvency practitioner and will see a limited company formally wound up. Assets are realised to deal with any outstanding liabilities. Any unsecured liabilities left after this will be written off.
The process can have many positive outcomes, including but not limited to:
- Close the company and walk away
- Continue to trade through a different company and purchase assets back
- Unsecured debts are written off
- Hold position of director at other limited companies
- Legal action stops
- Liquidator deal with creditors
- Take control, avoid court processes and compulsory liquidation
- Leases can be cancelled
- Reduce wrongful trading accusations
- Employee, director entitlements and redundancy pay
- Directors fulfil legal obligations
- Take control of the liquidation and choose a liquidator
Case Studies
Statestrong Limited
Kelly Burton • Manufacturing • Administration, Creditors Voluntary Liquidation (CVL)
Insolvency experts Wilson Field has helped turnaround the fortunes of a loss-making manufacturing company in Lancashire providing a new future for its 80 employees.
Businessman Russell Blaikie acquired the struggling 40-year-old Statestrong Limited, headquartered in Lytham St Annes, through a pre-pack sale and has been able to help the company immediately utilising his expertise in manufacturing and management.
Arrangements for the purchase of Statestrong’s business and assets were negotiated by Sheffield business specialists Wilson Field who affected the sale shortly after being appointed.
The company, which manufactures and supplies aerosol and liquid products for use in health and beauty, household, automotive and industry globally, posted sales of £12m last financial year, but had suffered pressure from creditors with outstanding arrears.
The total value of the deal is undisclosed but includes the business and the assets of the company based on Boundary Road in Lytham St Annes and Tarporley in Cheshire, which will now trade as Statestrong Products Limited.
Mr Blaikie said:
“Transactions of this nature are sensitive and require careful handling. The team at Wilson Field provided exactly the right professional approach.”
Wilson Field’s insolvency practitioners Kelly Burton and Joanne Wright worked closely with Mr Blaikie along with senior corporate case administrator Gareth Kinneavy.
Kelly Burton, said:
“The company had a wealth of expertise but was straddled with financial liabilities which ultimately made its future questionable. Looking forward, a previously distressed business now has a viable future.”
Derwent Castings Limited
Kelly Burton • Metals • Creditors Voluntary Liquidation (CVL)
Unsecured creditors owed money by a Derbyshire manufacturing company which went into liquidation are to receive a higher than the expected dividend of 60p in the pound.
A total in excess of £128,000 is due to be distributed to unsecured creditors of Whatstandwell-based Derwent Castings Limited, whose claims totalled over £192,000.
The company, whose roots date back to the 1940s, had traded profitably for a number of years but in late 2013 / early 2014 saw the cancellation of its largest sales contract which represented 70 per cent of its turnover.
Bosses at the company, which employed 16 staff including three directors, struggled to attract replacement business and had to drop prices. Further business was lost as a result of foreign competition.
Sheffield’s insolvency specialist Wilson Field was called in as liquidator and worked with the creditors’ committee of Derwent Castings Limited to secure the positive dividend.
Andy Wood, associate director and insolvency practitioner at Wilson Field said:
“Dividends for insolvent companies are generally low, or nothing, for a variety of reasons – cost of staff redundancies, difficulty collecting outstanding invoices, selling assets in a forced sale situation, selling specialist assets which have limited appeal to purchasers, deteriorating or perishable assets, as well as other costs involved.
“However, thanks to a very positive relationship with the creditors committee, I am delighted to return a healthy dividend to the unsecured creditors in the region of 60p in the pound.
“The supply chain is often greatly affected by a liquidation and in this case we have been able to help creditors.”
Derwent Castings Limited was incorporated in August 2002 and specialised in iron casting from the five-acre Derwent Foundry site at Whatstandwell near Matlock.
However, the iron founding operation at Derwent Foundry was first introduced back in 1946 by Wragg & Hawksley which produced cast iron pipes for the water industry.
In 1950 the foundry was acquired by WH Davis & Sons Ltd to supply castings for their railway wagon building business. Following a management buy out in 1984, the company was renamed Derwent Foundry Ltd and following its closure in July 2002, was bought by its present owners and renamed Derwent Castings Ltd.
Amongst jobs carried out on site were moulding using loose pattern and modern air setting (boxless) sand systems; metals work using the latest in electric induction melting producing a wide range of grey, SG and alloy irons; an independent Namas approved test laboratory, finishing, pattern making and machining facilities.
M J Squire Limited
Kelly Burton • Construction & Engineering • Creditors Voluntary Liquidation (CVL)
A bespoke joiners and shop fitters in Sheffield, M J Squire Limited, had been in its trade for more than 30 years.
However, recently it has been forced to close due to the downturn in the construction and retail industry.
The company was located at Orgeave Close in Sheffield, after working for many household names over the years including House of Fraser, Levi’s, Austin Reed and Tommy Hilfiger.
Until 2014, it had been a profitable company but over the past couple of years, it had been unable to secure profitable contracts.
February 10th, 2016 saw the appointment of Wilson Field’s Andy Wood and Robert Dymond as liquidators. This development for the company came as a result of suffering cash flow problems.
Operations at M J Squire Limited have now ceased and regrettably, all nine roles within the company were made redundant.
Andy Wood, insolvency practitioner from Wilson Field, spoke about his work on this case.
“Declining sales at M J Squires significantly impacted cash flow and the business’ ability to meet its liabilities. In the face of tough market conditions, the director has taken the difficult decision not to continue trading. The business has closed and the assets are being sold.”
“It is very sad to see this well-known local business cease to trade after over 30 years. The downturn in the retail sector has hit this business hard.”
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