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Consequences of CVLs for directors

Creditors Voluntary Liquidation (CVL) is an insolvency process whereby business activity ceases and a company is terminated. Assets belonging to a company are realised (sold for cash) and are used to repay creditors to whatever extent is possible.

Although a CVL is voluntary, it may be used to prevent compulsory measures being taken against a company further down the line, such as being issued with a winding-up petition and facing compulsory liquidation.

Company closure loss of goodwill

When a company ceases trading and enters into liquidation, brand recognition is lost. This means that the time, effort, and money that has gone into developing a brand reputation is lost. This is why it’s crucial, that the company’s situation is considered first, before any measures are taken.

If the business model of the company is functional, but it is suffering from cash flow problems due to debt, there may be other measures by which the company can be rescued rather than liquidated. These options, such as a creditors voluntary arrangement (CVA), pre-pack liquidation, allow for a continuation of trading while dealing with debts, should be considered in preference to a CVL wherever possible.

cvl

Post-liquidation investigations

During the process of a liquidation, it is a requirement for the insolvency practitioner (IP) to carry out an investigation into the conduct of company directors. The investigation looks for instances of wrongful trading, trading whilst insolvent or fraudulent trading, which are regarded as acting outside of the best interests of the company’s creditors.

Consequences of these accusations include disqualification from holding a directorship for up to 15 years, which is why it is crucial for company directors act quickly, if they feel that their company is facing insolvency. Making contact with a licensed insolvency practitioner as soon as possible is the best way to avoid any accusations such as these in the event of a liquidation.

Directors Loan account

A director’s loan account (DLA) is a record of transactions between a company and its directors aside from the salary and dividends. If a director borrows from the company, this is often referred to as an ‘overdrawn director’s loan’ and is considered a company asset. In this situation, the director is a debtor of the company and at some point, that money should be repaid.

Overdrawn directors loan accounts can be a major problem, as if you decide to close a company with an overdrawn directors loan account, it means you will owe your company that money. If you have taken out dividends, that represents a fair and accurate salary equivalent, this needs to be taxed at a standard rate personal rate.

Find out more about directors loan accounts

Personal liability

A limited company is classed as a separate entity to the directors/shareholders who are associated with it. This means that directors generally cannot be held personally responsible for the debts of a limited company

If a post-liquidation investigation finds company directors to have acted against the best interests of creditors, and therefore finds them guilty of wrongful trading or trading whilst insolvent, they may be made personally liable for the repayment of some or all of the company’s debt. While in control of the company, directors are legally obliged to act in the best interest of its creditors, and it is by failing to this that directors may end up in a position of personal liability.

If there have been any personal guarantees signed by the directors, these would have to be paid by the director and would not fall under the protection of limited liability.

Find out more about personal liability when closing a limited company

Redundancy for directors

If you have been employed by the company and have made payments via PAYE, directors can claim redundancy from the government. Just as with any other employee, there is a criteria which directors must meet in order to claim redundancy.

If you are entitled to a redundancy payout, this money could also be used to help fund the cost of the CVL.

Find out more on redundancy for directors

In summary

When a limited company begins to fail and directors decide to go through the process of a CVL, although it will bring an end to the company, directors have to consider the potential consequences.

If there has been any wrongdoing by the directors which involves fraudulent trading, wrongful trading or trading whilst insolvent, they could face the possibility of being made personally liable or face disqualification as a director. The position of any respective director’s loan accounts and the possible impact that could have moving forward, must also be considered.

How we can help

If you believe you company is insolvent and you’re facing the prospect of a liquidation, the best thing you can do is act quickly. The sooner you discuss the position of your company the better odds there are of achieving your desired outcome.

The best way of moving forward is to discuss the solvent position of your company with an insolvency practitioners such as ourselves. From here we can talk you through which procedure would be right for your company and any potential consequences there could be from your position.

Authored by Gemma Roberts

Gemma Roberts

Licensed Insolvency Practitioner & Senior Insolvency Manager

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