Creditors’ Voluntary Liquidation – A Director’s Perspective

Having to consider putting your Company into Creditors’ Voluntary Liquidation (or CVL) is not something any Director sets out to have to do.  Nevertheless, it is something that a great many Directors are faced with and so the first thing to understand is that you are not alone.

The second thing to understand is that your Company and your Business are not exactly the same thing.  Your Company is the legal entity you trade through. It owns the assets you use to trade, is liable for the debts you owe to suppliers and holds the contracts with your employees, customers, landlord and financiers.

Your Business is what you actual do every day be it build houses, service cars, sell flowers or anything in between. You currently do this through your Limited Company using its assets, suppliers and contracts but if your Company didn’t exist, the same Business could just as easily be done by a competitor or, more importantly, by you through a different entity.

You see, your Business isn’t insolvent – your Company is. This is an important concept that we will come back to shortly.

Your duties as a Director

Before going into the details of how a CVL works and how it can work for you, it is important to cover off a couple of your key duties as a Director of an insolvent Ltd Company.

Chief amongst your duties is that you must not knowingly continue to trade an insolvent company. Failure to adhere to this duty can result in you becoming personally liable for all losses incurred from the time when you first became aware that the Company was insolvent. This has the potential to be a very severe penalty and so it is important that you do not delay dealing with your Company’s current situation.

You also have a duty to safeguard the assets of the Company and avoid making any transactions that provide excessive benefit to a particular creditor or benefit some creditors at the expense of others. This is understandably a potential minefield when you are focused on doing all you can to make sure your Company survives.

Where does CVL come in?

Despite its name, a CVL is actually a Liquidation instigated by the Directors. Because of this, you have the opportunity to deal with an Insolvency Practitioner of your choice from the outset who will work with you to ensure that you understand and comply with your duties in the run up to Liquidation. A good IP will also help to reduce the stress on you by being proactive in dealing with your suppliers, employees and HMRC.

In addition to making sure you are compliant, your chosen IP has an overriding duty to realise the maximum value for the Company’s assets. In practical terms this means selling the Business and assets to the highest bidder which in the vast majority of SME liquidations will be the former Directors as the business is worth more to them than just the sum of its parts.

The advantages of CVL

The key advantages of taking action yourself to place your Company into CVL are:

• You get to nominate a Liquidator of your choice and work with him in the run up to Liquidation ensuring that you have the right advice about your options and responsibilities.
• Immediate relief from unwanted creditor pressure as your nominated Liquidator will be able to deal with your creditors for you.
• Write off all of your Company’s historic debts allowing you to trade forward in a new debt free entity.
• Terminate any leases or other contracts that are no longer required.
• Unrequired staff can be made redundant. These employees can then claim for wage arrears, holiday pay, redundancy and pay in lieu of notice from the Redundancy Payments Service thus freeing you from historic obligations.
• Bailiff attendance and other unwanted recovery action can be prevented which protects your business assets.
• You can make an offer to purchase the assets of the business from the Liquidator. These assets are likely to be of most value to you and so you are extremely likely to be the highest bidder and so can buy the assets back free of debt.
• You can close the Company in an efficient and controlled manner should you wish to simply walk away from the business.

Where to start

To jump back to our earlier point, it is your Company and not your Business that is insolvent. From the advantages detailed above, you can see that a CVL can be a perfect tool to save your Business free of the historic debts of your Limited Company.

However, in order to be able to successfully save your Business with the minimum level of risk and stress, it is essential that you act quickly as the level of creditor pressure you are under will only increase if you delay. The last thing you want is to receive a winding up petition or have a bailiff turn up and seize assets before you have put a rescue plan in place.