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Corporate insolvency: Creditor’s Voluntary Liquidation (CVL) explained

There are various routes which can be taken if your business gets into financial difficulty, some of which are designed to rescue the company and/or business, and others which return value to the company’s creditors as far as possible, and result in the winding-up and eventual dissolution of the company and business. For an overview of these procedures, please see Corporate Insolvency: What are the options for your busines? 

A Creditor’s Voluntary Liquidation (CVL) is a procedure by which the company or directors of an insolvent company, which has no reasonable prospect of recovery, formally place the company into the liquidation process to cease trading and wind the company up. Here, we explain the procedure and practical issues to be considered. However, if you would like legal advice on any insolvency procedures, we recommend you speak with our recovery and insolvency solicitors

What is a CVL? 

A CVL is a voluntary process initially instigated by a board of directors and is an alternative to the company being wound up by the court on a winding-up petition presented by a creditor of the company. It is used by a company that is insolvent with no reasonable prospect of turnaround to solvency, to bring the company to an end for the good of both the company and its creditors. 

Does a CVL result in a moratorium? 

Unlike in compulsory liquidation or administration, there is no moratorium on legal proceedings against a company that is in CVL. 

Who initiates a CVL? 

A creditor is unable to voluntarily wind up a company, as the process can only be initiated by a resolution of the company’s members. A creditor must use the court process to wind up a company compulsorily if it wishes to liquidate a company.

Applying for a CVL – the process 

A company may only enter voluntary liquidation if it has a fixed period which has expired, or an event has occurred which its articles say is an event leading to liquidation. The company must also have passed an ordinary resolution to wind-up, or has passed a special resolution that it be wound-up voluntarily. 

Before a company passes a resolution for voluntary winding-up it must give written notice of the resolution to the holder of any qualifying floating charge. The winding-up is deemed to have commenced at the time of the passing of the resolution. 

The company and the creditors may nominate a person to be the liquidator of the CVL. The directors must deliver a notice to the creditors seeking their decision on the nomination of a liquidator, by deemed consent procedure or by a virtual meeting. The directors must provide the creditors with the statement of affairs of the company’s business and assets no later than the business day before the decision date. 

The creditors must decide as to the nomination of the liquidator within 14 days of the winding-up resolution being passed, but no earlier than three business days after the notice. If the creditors nominate someone, that person takes office. If the creditors do not nominate someone, the person nominated by the members takes office. 

Once the liquidator is in place, however appointed, they must publish their appointment in the Gazette and serve the requisite notice on the Registrar of Companies within 14 days. They must also give notice to all known creditors within 28 days. 

What is the effect of a CVL on creditors? 

The creditors of a company in voluntary liquidation do not need to prove their debts formally, unless the liquidator asks them to submit a proof of debt by giving them notice in writing. The directors should provide the liquidator with full details of their creditors and how much they are owed.  

However, creditors owed money by a company that enters CVL may wish to send notification of their claim to the liquidator in any event, to ensure this is not missed in the paperwork. It is often the case that records are not kept perfectly when a company has been suffering from financial difficulties for a while. 

In a CVL the liquidator will collect the assets of the company and apply these for the benefit of the company's creditors in accordance with the statutory order of priority. 

The order of priority for paying creditors depends on the company position before the CVL, but in simple terms this will usually be in the following order, depending on how much money comes in from assets of the company:   

  • secured creditors 
  • the costs and expenses of the CVL 
  • preferential creditors – which are some employment costs, and now some tax such as PAYE, NIC and VAT 
  • a ‘prescribed part’ set aside for unsecured creditors up to a certain financial limit 
  • amounts owed to floating charge holders 
  • unsecured debts – which will rank ‘pari passu’ or equally between them 
  • statutory interest on all debts 
  • postponed liabilities – ie, unprovable debts 
  • any surplus is then returned to shareholders

For more information on this see: Corporate insolvency: what are the options for your business? and Corporate insolvency: a guide for creditors’ dealing with a company in financial difficulty

What is the effect of the CVL on the company? 

From the date of the resolution to wind-up, the company must cease its business activities and end trade, unless the liquidator believes that continuing to trade (even in a limited capacity) is required for a beneficial winding-up. 

The shares of a company in CVL cannot be transferred without the permission of the liquidator, and any alteration in the status of the company’s members is void. 

As the company will inevitably cease to trade as soon as it goes into CVL, employees should be aware that their employment is likely to end immediately. 

What is the effect of the CVL on the directors and shareholders? 

The directors must remain in office during a CVL, but their powers end unless the liquidator allows them to continue. 

Anyone who was a director or shadow director of the company within the period of 12 months ending with the date of liquidation is prohibited from being a director of, or promoting, forming or managing, any company using a prohibited name and from trading under a prohibited name. For more information on this see: Corporate insolvency: when it is possible to use a prohibited company name? 

In a CVL there is a real prospect that the members will not see any return on their investments, as the company’s assets are likely to be taken up paying the liquidator’s expenses and the company’s debts. Members are secondary to creditors in an insolvent liquidation. 

What is the role of the liquidator in a CVL? 

The liquidator’s role is to gather all the company’s assets, repay any outstanding creditors, and once all creditors are paid in full, then distribute any remaining assets to the shareholders depending on their shareholding. 

The liquidator acts as an agent on behalf of the company. They have many duties and powers as liquidators and must act independently and in the best interests of the company and creditors.  

The liquidator will investigate whether there have been any transactions at an undervalue, preferences or extortionate credit transactions or other misconduct by the directors or others. This may lead to bringing proceedings for money to be returned to the company for the benefit of all creditors, and in some circumstances, it can lead to criminal proceedings against officers of the company if appropriate. For more information see: Directors duties: what are they on insolvency, and how can a director avoid personal liability for breach? 

The liquidator is also obliged to file a report to the Department of Business Innovation and Skills on all directors, providing details of any misconduct, which might lead to a director being disqualified for between 2 and 15 years, depending on the misconduct. For more information see: Directors’ duties: being disqualified from acting as a company director, and obtaining leave to act despite disqualification

How does a CVL come to an end? 

Once all assets are gathered, creditors paid and all monies are distributed, the liquidator must make up an account of the winding up showing how the liquidation has been conducted and confirming how the company’s property has been disposed of. They must send a copy to the company’s creditors and give them a notice explaining how they may object to the liquidator’s release within 7 days. Once this period is over, the liquidator must send to the court and the Registrar of Companies a copy of the account and a statement of whether any of the company creditors objected to the liquidator’s release. 

The liquidator will vacate office, and once the report and notice of vacation is filed with the Registrar of Companies, then after 3 months Companies House will automatically dissolve the company from the Register. 

How much does a CVL cost? 

A CVL is almost exclusively run by a licenced insolvency practitioner once the company has undertaken the legal formalities to go into CVL. The cost will therefore depend on the hourly rate of the liquidator. Hours spent will be dependent on how big the company is, the amount and type of assets to be collected and liquidated, how many creditors must be dealt with, and whether there are any disputes over assets or shareholder disputes.  

Any company considering a CVL should get an idea of costs from their recommended IP before deciding. 

About our expert

Eleanor Stephens

Eleanor Stephens

Senior Recovery & Insolvency Solicitor
Eleanor Stephens is a senior insolvency solicitor with over 20 years' specialist knowledge in all aspects of insolvency, both corporate and personal, covering contentious and non-contentious matters.

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