Creditors’ Voluntary Liquidation: Advantages and Disadvantages

Have you noticed that bills are becoming more difficult to pay? If you’re doubtful that circumstances will get better for your business, it may be time to consider a creditors’ voluntary liquidation.

We’ve collated some of the most common questions that clients ask us about creditors’ voluntary liquidations (CVLs), and created a guide that provides everything you need to know about them. If you’re considering one for your business already, you’ll no doubt be wondering what the pros and cons are.

Advantages of a CVL

You remain in control.

By choosing a voluntary liquidation, you take control of proceedings, rather than having liquidation forced upon you at a later date.

 

Better chance of creditor satisfaction

Businesses that wait for a compulsory liquidation to close them down have usually traded for longer than they should, meaning that there’s often less money and fewer assets to pay off their creditors with.

 

Reduced personal liability

Assuming that the business owner has acted in a responsible manner and used professional advice properly, then they will be protected from personal liability for their company’s debts.

 

Helps to avoid legal action

A creditors’ voluntary liquidation allows directors to get ahead of insolvency situations, meaning that there’s a smaller chance of being hit with winding-up petitions.

 

Transparency

Creditors’ voluntary liquidations make for a structured way to dissolve a company. This reduces the risk of any legal disputes or complications.

 

Potential director redundancy claim

It’s possible that the company director can claim redundancy when their business is closed. If they have worked as an employee for two years or more, worked at least 16 hours a week, and received their wages under PAYE, then they may be entitled.

Disadvantages of a CVL

There are few disadvantages of a creditors’ voluntary liquidation that aren’t shared by other methods of company closure. As such, these include,

 

Making staff redundant

A sad fact of any company closure is that staff will need to be laid off. If the sale of liquidated assets doesn’t cover staff redundancy payments, the National Insurance Fund (NIF) may be able to help them.

 

Personal guarantees

If you’ve taken out any finance with a personal guarantee (e.g. borrowed against your house or other personal asset), the lender may come to you personally to cover the debt.

 

The closure is public

As with any business closure, creditors’ voluntary liquidations are reported in The Gazette.

 

 

What is a creditors’ voluntary liquidation (CVL)?

A creditors’ voluntary liquidation (or CVL) is a means for business owners to close down their companies at their own discretion.

This is in contrast to compulsory liquidations, which are forced upon businesses by unpaid creditors.

Creditors’ voluntary liquidations allow businesses to pay their creditors in a structured priority order mandated by law. Choosing this more responsible option when insolvent can help to maintain some goodwill with suppliers and other creditors should you ever do business with them again.

Just like any other liquidation, any business assets are liquidated in an attempt to pay off any debts the company may have. In the event of there being any funds left over these are then distributed among any shareholders.

Once the assets have been liquidated and the resultant funds have been handed out, the company is then said to be formally dissolved and no longer exists as a legal entity.

 

 

Why might I need a creditors’ voluntary liquidation?

Generally speaking, business owners can opt for a creditors’ voluntary liquidation at any point, but will typically opt for one when faced with debt they find insurmountable. If you frequently find that company bills are left unpaid, and you don’t foresee trading into a profitable position, it is likely that a CVL will be appropriate for your company.

As directors have a legal duty to act in the best interests of both the business and its creditors, a creditors’ voluntary liquidation is the most responsible move they can make during insolvency.

Becoming insolvent isn’t the only reason that a company might file for a creditors’ voluntary liquidation, however. Here are just a handful of the reasons that we regularly encounter.

 

Debts accumulating

Business owners may be able to see in advance that their business will struggle to stay afloat. If debts are accumulating and there doesn’t seem to be any way in which the business can be turned around, directors may opt to get out while the going is (relatively) good.

 

The market is suffering

We’ve seen several industries suffer because of external socio-economic issues in recent years. Hot tub sales slowed down when utility bills soared, and travel agents struggled when Covid-19 prompted a national lockdown. If market conditions have suddenly made your business unviable, it may be time to get out.

 

Losing a key client

Without proper diversification, companies leave themselves vulnerable to outside forces. We’ve encountered several businesses that are far too reliant on one client. When another company woos your crucial customer with a better offer, it can be catastrophic. If there’s no hope for securing other clients to make up for the loss, it can often be best to cut your losses quickly.

 

Getting ahead of a compulsory liquidation

If legal action has been taken against your business, such as a winding-up petition or other complaint, it can seem like an eventual compulsory liquidation is inevitable. Getting ahead of this by going down the voluntary route can save everybody (including yourself) time in the long run.

 

Shareholder decision

Sometimes it’s taken out of the hands of the director by the company’s shareholders making the decision instead. They may have noticed one of the reasons above or simply have a different venture to pursue.

 

 

What is the process of creditor voluntary liquidation?

While every case is different, there are several steps that almost all will take. Every creditors’ voluntary liquidation must adhere to the Insolvency Act 1986 and Insolvency Rules 2016.

 

1. A licensed insolvency practitioner is found

Insolvency practitioners (IPs) are licensed professionals that act as official liquidators. They oversee the liquidation to ensure that it complies with relevant regulations and laws. As an impartial third party, their role requires them to protect creditors’ best interests.

 

2. Shareholders’ resolution

The second step sees all shareholders call a meeting together in which they resolve to both wind up the business and agree on the insolvency practitioner acting as liquidator. A share-value majority of 75% is required to push both decisions through.

 

3. Notifying creditors

After a decision has been arrived at from the meeting, all of the company’s creditors are then notified of its decision to liquidate via a CVL. This is typically done by the insolvency practitioner.

First, creditors must be notified of the intention via the London Gazette, and either a date for a creditors’ meeting or deemed consent is set, depending on the insolvency practitioner (IP).

This document indicates how the company became insolvent with supporting figures.

Creditors’ consent of the liquidation can now be assumed after being notified that they have a certain period of time in which to object to the process. It is likely that in the near future, all practitioners will use this route in order to save on time costs.

In either case, a full statement of affairs must be made available to the creditors, either at the creditors meeting or at least 1 working day before the date of deemed consent.

 

4. Creditors’ meeting

Within 14 days of the shareholders’ meeting, a similar event featuring the company’s creditors must be held. In this meeting, creditors are able to either appeal against the choice of insolvency practitioner or approve of it. Assuming they choose the latter, the process moves on to the next step.

 

5. Liquidating Assets

After assuming control of the company’s assets, books, and accounts, the liquidator then proceeds to sell everything they can. The takings from this asset sale are then distributed among the company’s creditors in a legally prescribed order. For example, secured creditors receive highest priority, and get paid first.

 

6. Reporting to creditors

Regular reports are sent to the creditors from the liquidator that provide updates on how the liquidation is going, and how much has been raised from the asset sale.

 

7. Funds are distributed

Once all assets have been realized and any legal disputes or challenges have been resolved, the Liquidator distributes the available funds to creditors in accordance with the statutory hierarchy.

Secured creditors are paid first, followed by preferential creditors (e.g., employees owed wages and certain taxes), and finally, any remaining funds are distributed to unsecured creditors.

After the assets have been sold and any legal challenges have been resolved, the liquidator then distributes the funds raised in legally prescribed priority order.

Priority is given to secured creditors, then preferential creditors, such as employee wages or unpaid taxes. Only after these have been covered do unsecured creditors finally get paid out.

 

8. Dissolution

Once all of the above steps have been taken, the company can then be legally dissolved. All creditors may not necessarily get paid, but there has to have been an attempt to pay as many as possible given the mandatory order the liquidator follows. After dissolving, the company no longer exists as a legal entity.

 

On average, the whole process takes around 6 months, although after the initial period of collating information, you will largely be able to leave the process to be handled by the liquidators.

Directors do need to be available over the phone for around half an hour on the date of the creditors meeting, but from then until the final processing stages, you can be left to get on with new ventures.

 

How much does a creditors’ voluntary liquidation cost?

The price of a creditors’ voluntary liquidation generally depends on the complexity of the case and is usually paid for from the sale of the assets or the director themselves should the assets not cover the fee.

Paul Turner, business adviser at Forbes Burton, recommends that business owners should proceed with caution when pricing up quotes. “You may find some firms offering prices as low as £1,500 or £2,000”, he explains, “but business owners should be very wary of using these. In general, these firms tend to cost you much more further down the line. Often, they’ll use your company’s director’s loan account to chase you up for more money midway through the process, potentially costing you many multiples more than the initial fee”.

At Forbes Burton, we charge a one-off fee and no more. One of our advisers will be able to give you a quote after discussing your business with you.

 

Need advice on a creditors’ voluntary liquidation?

Knowing what to do when your business is struggling is difficult, that’s why we offer free, no-obligation advice to explore your options.

Call us today for free, confidential advice on 0800 975 0380 or arrange a free meeting with one of our advisers.

Alternatively, try out our liquidation test, to see if your company would qualify.