What is a Creditors Voluntary Liquidation or CVL? - Definition of Insolvency - Other Options
Creditors Voluntary Liquidation or CVL
So what is a Creditors Voluntary Liquidation or CVL? Are there other options?
A Creditors Voluntary Liquidation or CVL is started by the directors and shareholders of the company, when your company is insolvent, to bring its life to an end. A Creditors Voluntary Liquidation is the most popular type of liquidation process in the UK.
If you think that your company is insolvent then you need to take advice from a Licensed Insolvency Practitioner so that they can undertaken a review of your company's financial affairs to determine whether or not it is. This is important because several duties fall on you as a director once your company becomes insolvent, and the recent case, BTI 2014 LLC v Sequana SA and others [2022] UKSC 25, sets out what those duties are, and when they need to be followed.
The definition of "insolvency" or the "inability to pay debts" is found in Section 123 of The Insolvency Act 1986. In general terms an insolvent company is one that cannot pay its debts as and when they fall due (this is called the Cash Flow Test) or its liabilities exceed its assets (this is called the Balance Sheet Test).
A CVL or Creditors Voluntary Liquidation involves the appointment of a liquidator. The Liquidator has two main duties, which are:
- Realising all of the Company's assets to turn them into cash.
- Adjudicating creditors claims and then distributing the sums realised in the order of priority set out in Rule 6.42 of The Insolvency (England and Wales) Rules 2016.
When your company is insolvent you, as a director of your company, have a duty to take insolvency advice. You may be more interested to know that you also have a duty to review the situation and take advice to see whether there are any other options, other than a liquidation, which would be better for the company and the creditors. That review, with a Licensed Insolvency Practitioner, will enable you to plan the best outcome (for you as a director and for the creditors) rather than being rushed into what might be an unnecessary Creditors Voluntary Liquidation.
The Review
The review might suggest a better approach than a Creditors Voluntary Liquidation such as:
- An informal work out
- A company restructure and the continuation of the business:
- via a Company Voluntary Arrangement or
- via an Administration Order or
- via a Pre-pack Administration or
- via a management buy out or
- via a Creditors Voluntary Liquidation and the commencement of a phoenix re-start company.
- Via a Restructing Plan
So don't get rushed into a creditors voluntary liquidation. First consider the definition of insolvency - then if your company is insolvent obtain free insolvency advice - identify all the options other than a liquidation of the company - determine the advantages and disadvantages and the cost of each option - work out what option suits you and the creditors best - then agree a plan for the way forward.
If you would like a free meeting to discuss your company's affairs and the options open to it, including a CVL, please contact Chris Parkman on 01326 340 579 or email chris.parkman@purnells.co.uk
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