What is a creditors’ voluntary liquidation (CVL)? And how do you place a company into a CVL? Fiona Gaskell of Clough & Willis explains the process.

What is a creditors’ voluntary liquidation (CVL)?

If a company cannot pay its debts, it may decide to put itself into liquidation. This is known as a creditor’s voluntary liquidation (CVL). The company is insolvent and therefore owes money to its creditors but the company itself has decided to take steps to enter into liquidation rather than being forced to do so as a result of the presentation of a winding-up petition by a creditor (this is known as a compulsory liquidation).

Liquidation will usually be appropriate if the company is unlikely to be able to trade out of its difficulties. If a company put itself into liquidation, the main advantage for the directors and the shareholders is that they can control when the company goes into liquidation and very often who will be appointed liquidator of the company. The liquidator would deal with any legal action against a company once it has entered a CVL.

How are liquidators appointed in a creditors’ voluntary liquidation (CVL)?

The liquidator must be a licensed insolvency practitioner and the directors of the company usually meet with an insolvency practitioner once they become aware that the company is in serious financial difficulties. It is extremely important that the directors do not ignore evidence of the company’s insolvency because that may lead to claims being brought against them personally if they have allowed the company to trade while it is insolvent. If the company is or is likely to become insolvent the directors’ duties become focused on creditors rather than shareholders.

An experienced insolvency practitioner will be able to advise a company about all the different forms of insolvency processes which the company can enter, and which is likely to be the best for the company, its creditors and business, and the directors. There may be alternatives which are better suited for all of those, such as administration or a new restructuring plan.

If the directors of a company put it into liquidation, they will often want to have someone in charge of the process who they feel they can work with and who will understand the difficulties that they have faced and who they feel will be sympathetic to their position. Therefore, normally the same insolvency practitioner who advises the directors will be appointed liquidator and will be responsible for getting in any money due to the company and making any payments to creditors.

What is the role of liquidator in a creditors’ voluntary liquidation (CVL)?

It should be stressed that once an insolvency practitioner is appointed as the liquidator their duty is first and foremost to the creditors and not to the directors. Ultimately the role of the liquidator is to:

• get in the company assets and understand its liabilities and reasons for failure
• pay the sums recovered in order of priorities: secured creditors; pre appointment fees; the liquidator’s fees and expenses; preferential creditors; creditors secured by floating charge; then unsecured creditors and associated unsecured creditors; and finally if anything is left, shareholders.

The liquidators produce a payment to creditors by collecting in unpaid invoices, sale of company assets and recovery of any assets or money which has been taken out of the company thereby depriving the creditors of payment. Note that from December 2020 many HMRC debts become preferential making it much less likely that unsecured creditors will receive a dividend.

If the company or its directors have done anything which would be disadvantageous to creditors prior to the company going into liquidation, it is also the duty of the liquidator to pursue the directors. This could be for payments that they may have made to themselves, their family and other associates, or any assets which may have disappeared or been sold at a reduced price prior to liquidation. If the liquidator finds any evidence of such actions, then they will have to confront the directors and, if necessary, pursue claims against them personally in order to recoup payments which should not have been made.

A common example of this is where part of a director’s remuneration package may have been taken as payment of dividends, which is more advantageous from a tax point of view, rather than as a salary. But if a company is insolvent, it should not have been declaring dividends to shareholders and a liquidator will need to claw back that money for the benefit of creditors. This may mean that payments which have been made to directors over a period of years can be looked at very closely and very significant claims can be made.

The powers of the liquidator are wide ranging and the directors are no longer in control of the company but are obliged by law to cooperate with the liquidator regardless of whether that is in their financial interests. In cases where directors have given personal guarantees to secure company debts it is in their interests to assist the liquidator to recover as much as possible.

How do you place a company into a creditors’ voluntary liquidation (CVL)?

Putting a company into a CVL is quite straightforward and is usually guided by the insolvency practitioner. The process of a CVL generally goes as follows:

• After consultation with an insolvency practitioner, the directors will call the extraordinary general meeting on 14 days’ notice where the shareholders will vote to pass a resolution to wind-up the company and usually to appoint a named liquidator.
• In order to wind-up the company, 75 per cent by value of the shareholders attending and voting must vote in favour of the resolution. However, for the vast majority of the small to medium companies, the directors who have consulted the insolvency practitioner are likely to be the shareholders or a majority of the shareholders.
• During the time between calling a shareholders meeting and that meeting taking place, the proposed liquidator will notify the creditors of the company of its intention to enter voluntary liquidation and provide them with information ahead of the creditors’ decision process about the company’s financial position. The creditors are, however, only entitled to three business days’ notice of the proposed CVL. These days it is rare for any formal physical meeting to take place. Sometimes the creditors will not oppose a director’s choice of liquidator and the liquidator is appointed by ‘deemed consent’. A virtual meeting of creditors may take place if the creditors have questions or concerns about the process and the appointment of the liquidator and the proposed liquidator will provide details of how to dial into the meeting.
• Once the resolution to wind up the company has been passed by the shareholders, the liquidator must file a copy at Companies House and it must be advertised in The Gazette.
• The liquidator will also have to carry out an investigation as to the company’s financial affairs. Up to that point the information they have will have been provided by the directors, but once in office the liquidator is entitled to call for all of the books and records of the company and to investigate the company’s affairs in order to achieve the best result for creditors. The liquidator must also make a report on directors’ conduct to the Insolvency Service so that disqualification can be considered.
• Once all assets have been realised and distributions have been made to creditors (there is a set order of priority in the Insolvency Act 1986 and the liquidator will advertise for claims for a final cut off), the liquidator will take the formal steps to agree the final receipts and payments.

Upon completion of the CVL, the company will be struck off the Companies House register. Any liabilities which remain unpaid by the company will be written off, unless they were personally guaranteed - in which case the creditor with the benefit of the guarantee may pursue the guarantor.

About the author

Fiona Gaskell is a Partner and Dispute Resolution Solicitor at Clough & Willis, who specialises in property disputes and insolvency, acting for private individuals, insolvent businesses and trustees, liquidators and administrators.

See also

What you need to know about Corporate Insolvency and Governance Bill

What to do if you receive a winding up petition from HMRC

A guide to members' voluntary liquidation (MVL)

Find out more

Companies House (GOV.UK)

Insolvency Act 1986 (Legislation)

Image: Getty Images

Publication date: 3 August 2020

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.