Creditors Voluntary Liquidation is a method enabling directors to voluntarily close an insolvent company at their discretion. There are many reasons for a creditors voluntary liquidation and directors frequently opt for this route to gain control in situations where there’s ongoing pressure from creditors and the looming threat of a winding-up petition. In this blog, we shall see the reasons for a creditors voluntary liquidation.
Understanding Creditors Voluntary Liquidation
Before going into the reasons for a creditors voluntary liquidation, let us understand the concept first. Creditors Voluntary Liquidation is a formal process that occurs when a company’s shareholders opt to dissolve the business. This decision is typically made when the directors acknowledge that the company is insolvent and has no prospects of recovery. In most cases, it is initiated to avoid compulsory liquidation by creditors or directors.
To initiate a CVL, a significant majority of the company’s shareholders, typically 75%, must vote in favour of the liquidation. This marks the beginning of the formal process that entails shutting down the company’s operations and realising its assets to maximise returns for creditors.
Benefits of Selecting Liquidation
Opting for liquidation through the CVL process offers several advantages. It allows the company to direct the closure through a well-defined legal procedure and relieves the burden of creditor pressure. Professional assistance becomes integral in this phase to ensure a smooth and orderly process.
Once the insolvency practitioner takes control, the director’s responsibilities come to an end. However, directors are still required to provide specific information to the IP as the liquidation process advances, ensuring transparency and compliance with legal requirements.
Importance of Creditors Voluntary Liquidation
A Creditors Voluntary Liquidation is a formal insolvency procedure that provides a legal framework for closing down a company. This process is initiated when the Director of an insolvent company decides to cease business operations and dissolve the company.
Although CVL is a voluntary process, it typically comes into play after a prolonged period of financial distress and instability within the company. By this point, the prospects of a successful financial turnaround are minimal.
While it may not be the preferred outcome for an insolvent business, opting for a CVL can be the most pragmatic solution for all involved parties. It offers a structured approach to addressing financial insolvency and winding down the company in a manner that is legally compliant and beneficial to creditors.
Reasons for a Creditors Voluntary Liquidation
The major reasons for a creditors voluntary liquidation have been mentioned below:
1. Reducing Trading Losses
Commencing a Creditors Voluntary Liquidation means the business ceases its operations. One of the major reasons for a creditors voluntary liquidation is that it helps prevent further trading losses. It also demonstrates the Director’s responsibility and prudence in taking action to mitigate additional financial losses.
2. Ending Legal Threats from Creditors
Another one of the key reasons for a creditors voluntary liquidation is that a CVL serves as a shield against legal actions initiated by creditors. Directors and staff are relieved from direct interactions with creditors, as the insolvency practitioner takes responsibility for managing the company’s debts.
3. Asset Repurchase and Business Revival
In some instances, a director from a liquidator corporation may express interest in acquiring assets from the company undergoing CVL. Independent third-party evaluations are typically conducted to ensure fair asset transactions. This opens up the possibility of strategising a revival of the business in a sustainable manner, especially when there are no fresh funds available. This may also involve preserving jobs and generating funds through asset sales.
4. Avoiding Compulsory Liquidation
Most directors prefer to avoid the process of having a court order to liquidate their company. Opting for a CVL offers a proactive and healthier alternative to compulsory liquidation and is one of the major reasons for a creditors voluntary liquidation. Instead of being subjected to the official receiver’s office through the court system, the Director retains control by selecting the insolvency practitioner to work with. This choice grants the insolvency practitioner more control over the process and its timeframe, providing greater flexibility.
Possible Effects of a CVL
After looking at the reasons for a creditors voluntary liquidation, the possible after effects of a CVL include:
1. Cancellation of Leases and Financial Agreements
One notable effect of a Creditors Voluntary Liquidation is the potential cancellation of leases and financial agreements. While financial leases typically continue until the agreed terms are fulfilled, operating leases may be terminated early in certain cases. Financial leases can also offer the advantage of deducting depreciation for tax purposes.
2. Redundancy Claims for Directors
Directors may be eligible for redundancy compensation as a result of a CVL. This compensation can encompass various aspects, including accumulated pay-outs, vacation time, and notice pay. In some instances, a CVL may be funded through the director’s redundancy claim, potentially leaving surplus funds available for other purposes.
Can Creditors Voluntary Liquidation Be Reversed?
One of the major reasons for a creditors voluntary liquidation is that it is typically made to prevent imminent legal actions by creditors, such as winding-up petitions that could lead to compulsory liquidation. However, there are situations in which it may become feasible to reverse the CVL process.
It’s feasible to reverse the process as long as the company’s assets have not been sold off and the company hasn’t been officially dissolved. If there’s a change in circumstances, presenting an opportunity to repay debts and revive the company’s financial stability, the CVL process can be stopped.
In cases where the company has already been dissolved, a formal application known as administrative restoration can be pursued to reinstate the business. Administrative restoration allows for the revival of the company, provided certain criteria and procedures are met.
Post Creditors Voluntary Liquidation Consequences
Upon the completion of a CVL, several important consequences follow:
1. Cessation of Existence: The company undergoing CVL ceases to exist as a legal entity. It is removed from the register maintained by Companies House, signifying the formal end of its existence.
2. Unpaid Debts: Any outstanding debts of the company will be addressed. If these debts were personally guaranteed by individuals, they may be pursued for repayment. Directors who provided personal guarantees for company debts may find these obligations enforced.
3. Director Accountability: During the liquidation process, the liquidator is obligated to scrutinise the actions taken by the directors. If it is found that directors failed to fulfil their fiduciary duties while knowingly insolvent or engaged in transactions detrimental to creditors, they could face legal consequences. Allegations involving wrongful trading, fraud, or misconduct can result in directors becoming personally responsible for some or all of the company’s debts.
4. Director Disqualifications: In severe instances, directors could face disqualification from serving as directors of any company for a set period, which can extend up to 15 years. Such disqualifications, however, are infrequent. In most cases, directors are usually granted the chance to take on different roles or establish new businesses if they opt to do so.
Final Thoughts
One of the major reasons for a creditors voluntary liquidation is when a company faces financial challenges. It may serve as a proactive response to prevent imminent legal actions by creditors, such as winding-up petitions. In cases where financial recovery becomes infeasible, CVL offers a structured exit strategy to protect the company’s interests. It allows directors to demonstrate their prudence and responsibility in minimising further trading losses. CVL also enables the settlement of outstanding debts, safeguarding against legal threats from creditors. In situations where asset repurchase or business revival is considered, CVL can provide a valuable solution.
