Creditors Voluntary Liquidation

A creditors voluntary liquidation is one initiated by the members of the company, rather than being imposed by an external body. It usually happens when a company is no longer able to trade and wants to deal with outstanding debts as quickly as possible. The company is wound up, and the assets converted into cash to pay off creditors.

If the company is solvent it is a relatively straight-forward matter. However, this route is often taken when a company is insolvent, in which case it is known as a creditors voluntary liquidation (CVL).

The number of CVLs has dramatically increased in recent months, with over 3,200 in the first quarter of 2009 – a 62% increase on the same quarter in 2005.

It’s possible for the assets of the business to be sold to the directors who put them into a new company, trading in a similar way to the old one. This is called a phoenix company, and while legally permissible it is a complex process to achieve.

The Process of Creditors Voluntary Liquidation

A company will choose to initiate a CVL when it is insolvent and there is no prospect of recovery. This might be because the market for the company’s products has deteriorated and is unlikely to recover, or because the management don’t have the determination to continue.

The directors call an extraordinary general meeting of the shareholders and explain that the company is insolvent and that it’s not right to take further credit. The directors want to avoid accusations of wrongful trading, and consider that the best option is a CVL. At this point the business will usually cease trading.

When this is agreed, a liquidator, or insolvency practitioner, is nominated to manage the process. One of their first steps will be to call a meeting of the creditors to explain the situation. At this meeting the creditors will formally appoint the liquidator and, if appropriate, form their own committee to oversee the process.

The Risk of Wrongful Trading

Company directors have a responsibility towards their creditors. While it might be tempting to want to shut down a company in order to walk away from it debts, this is unethical and can lead to prosecution for wrongful trading. If proven, the directors can become personally liable.

On the other hand, a company that is insolvent does not have to cease trading if the directors consider the business to be viable and there is potential to turn it around. However, they do need to take steps to become solvent as soon as possible, such as entering administration or a voluntary arrangement.

The Importance of Good Advice

Because CVLs are one of the most common ways of dealing with insolvent companies, they tend to be a recommended solution. However, before entering into any form of insolvency action it is always wise to take advice from company turnaround specialists.

They have the experience and the expertise to advise the right course of action for a company. Every business is different, with a unique set of circumstances, and what’s right for one will not be right for another. It’s essential that advisors understand that there is no single solution to the commercial challenges faced by businesses.

At Touch Financial we’ve worked with a wide range of organisations, from the very small right up to international conglomerates. We specialise in providing cash flow solutions, which are vital for businesses looking to deal with potential insolvency situations.

Our approach is enlightened, with a commitment to excellence in all that we do. We don’t just offer our customers a menu of products to select from. We build relationships, listening to and learning our customers’ individual needs so that we can create a solution that works for them.

Are you concerned about cash flow and want advice on imaginative, cost-effective solutions? Why not give us a call and make an appointment for a no-obligation consultation with one of our specialists? It’ll take a few minutes of your time, but might make all the difference to the stability and success of your business.

Also in this section

Every month Touch Financial help businesses improve their cash flow with invoice finance. Request a quote to find out how much extra cash you could raise.

Get a quote >