After two years of the coronavirus pandemic (and there doesn’t seem to be much relief from it as we head into winter), retailers, small businesses, and companies in certain industries, like travel and hospitality, have struggled to keep going.
In order to stay in business, many companies have adopted a particular tool in the restructuring toolkit, and it’s proving rather useful. Creditors’ Voluntary Liquidations (CVLs) have become popular as businesses work to come out the other side of the pandemic.
So, let’s look at how useful a CVL really is for struggling businesses and the impact it has on their creditors.
What is a Creditors’ Voluntary Liquidation?
First, let’s just give you a brief overview of a Creditors’ Voluntary Liquidation. It is a way of liquidating an insolvent limited company, i.e. when the company can no longer pay its bills when they are due. The shareholders and directors of the company voluntarily enter into a liquidation process and come to an agreement with their creditors, managed by an appointed insolvency practitioner (IP), to close the company.
When entering a CVL, the company has to stop trading, employees are made redundant and the company is removed from the Companies House register. The IP looks to sell any assets the liquidated company holds, such as stock, buildings, equipment, and machinery, to raise funds to pay creditors.
Generally, the decision to liquidate the company is taken due to a culmination of insolvency and creditors threatening to take further action, i.e. apply to the court for compulsory liquidation. For any liquidation process, an insolvency practitioner must be appointed and they will handle the entire liquidation process.
What’s the difference between a CVL and a CVA?
It’s important not to confuse the two as there are key differences between a CVL and a CVA; a CVL is a liquidation process in which the company is closed whilst a CVA (Creditors’ Voluntary Arrangement) is a rescue option for businesses because it stops creditor action but allows the business to continue trading.
For many businesses coming out of the recent coronavirus pandemic, they are using CVAs to manage their debt. Whilst both are formal insolvency processes and must have a licensed IP to manage the procedure, and they are both voluntary, there are significant differences between the two.
- Creditors’ Voluntary Liquidation – the company ceases trading, usually just before or when it enters the liquidation process; the power of the directors stops immediately after the IP is appointed, but they must still work with the IP throughout the process; the IP takes on the role of the liquidator and it is their duty to act on behalf of the creditors.
- Creditors’ Voluntary Arrangement – the company is able to continue trading; the directors stay in charge and run the company; they enter into an arrangement, i.e. agreement, with their creditors with directors committing to make monthly payments to creditors to pay off the company’s debts, and make provisions to ensure any future debts are paid when due.
From a creditor’s point of view, there’s little they can do to stop a company from going into liquidation and if their debt is unsecured or they are not a priority creditor, there is every chance they will lose the money owed to them. That said, if the creditor is owed the major proportion of the company’s total debt, they do have the choice of replacing the IP chosen by the directors of the company to one of their choosing.
However, with a CVA the creditors have much more say on whether the company is allowed to negotiate a CVA agreement. For example, if the creditors don’t agree with the monthly payment proposed by the company, they can ask for them to modify it; the same applies to the length of the agreement. HMRC, who is now a priority creditor after a change in the regulations in 2020, will add a clause in a CVA that makes sure tax liabilities in the future remain up-to-date, that tax returns are filed and that any outstanding VAT is filed and paid.
Advantages and disadvantages of a Creditors’ Voluntary Liquidation
When you are in a position where a company is not able to pay their existing debts and a rescue package is not going to help either, a CVL may be the only option without being forced into liquidation by a creditor. There are advantages and disadvantages to liquidating a company voluntarily:
- The directors of the insolvent company have control over when they enter the liquidation process. Therefore, there is more time to liaise with an insolvency practitioner and prepare the company for liquidation.
- With the exception of any personal guarantees made by the directors, any outstanding debts are written off or paid for out of the funds raised by the sale of assets, which is handled by the IP.
- Any legal action by creditors stops as soon as the company enters the liquidation process. Creditors are not allowed to proceed with any court action.
- Staff that has been made redundant are entitled to claim redundancy pay and any other applicable statutory entitlements. Redundancy payments are either paid by funds raised from the sale of the company’s assets or if there aren’t sufficient monies, they can claim via The National Insurance Fund for redundancy, holiday pay, and any unpaid wages.
- The directors of the company may also be able to claim redundancy if they were an employee and meet other criteria.
- Any HP agreements of leases are terminated at the start of the liquidation process unless there are any personal guarantees.
- The company must cease trading immediately when entering the liquidation process and will be removed from the Companies House register.
- The directors of the company will be investigated by the IP who will review their conduct to ensure no wrongful trading has occurred or any other serious offense.
- Employees are made redundant by the IP (liquidator) handling the liquidation process.
- If the directors made any personal guarantees, they become liable for those debts, and creditors are entitled to pursue payment via the courts.
- Shareholders will not receive a return on their investment, particularly as any monies raised by the sale of assets is likely to be used to pay the liquidator and creditors.
- The directors are responsible for repaying their director’s accounts if they are overdrawn and the IP/liquidator can enforce payment of the debt.
- It is a public process as the CVL’s creditors’ meeting must be published in The Gazette and the liquidation goes on the public record, thereby potentially damaging a director’s reputation.
Company individual insolvency is not something that anyone wants to deal with; however, the sooner a financial problem is recognized, the sooner it can be dealt with and the more potential the company has in recovering. If you are struggling with debt or are considering winding up a solvent company, contact Simple Liquidation for assistance. For more information on how our professional insolvency practitioners may be able to help your business, contact us today.