The advantages and disadvantages of Creditors’ Voluntary Liquidation

Creditors’ Voluntary Liquidation, or CVL, is an official insolvency process that results in company closure. All assets are liquidated and the proceeds used to repay company debts as far as finances allow.

When a company is insolvent and has no hope of recovering, the process offers advantages to directors and creditors. But there are also some disadvantages to be aware of when entering a CVL.

So let’s look in more detail at the advantages and disadvantages of this process.

Advantages of a Creditors’ Voluntary Liquidation

Directors have more control

Unlike compulsory liquidation, directors can take control of the process by choosing when to enter liquidation. They can also appoint their own choice of liquidator, whereas if they wait for a creditor to wind up the company, the Official Receiver takes control.

Potential to claim director redundancy

It’s relatively unknown that directors can claim redundancy pay on the liquidation of their company in some cases. If a director has worked as an employee for the company for at least two years, received a salary under PAYE, and worked a minimum of 16 hours per week in a practical rather than an advisory role, they may be able to claim the same statutory entitlements as member of staff.

Fulfilling director legal obligations

Under UK insolvency law directors are legally obliged to be aware of their company’s financial position at all times. By entering into voluntary insolvent liquidation they prove that this is the case and can limit creditor losses as well as their own reputational damage.

Debts written off

All unpaid debts are written off at the end of a Creditors’ Voluntary Liquidation, which means creditor pressure stops and directors can typically move on to other ventures without the burden of debt.

Allegations of wrongful trading are reduced

By making the decision to cease trading and place the company into voluntary liquidation, the directors are prioritising their creditors’ interests. This can mean there’s less chance of wrongful trading allegations following the liquidator’s investigation into how the company became insolvent.

The business is closed down efficiently

CVL is a formal process and must be administered by a licensed insolvency practitioner. This means the business is closed down in an orderly manner according to UK insolvency laws, and all statutory regulations are met.

Disadvantages of a CVL

Closure of company

CVL results in the closure of the company, which is removed from the register at Companies House. It represents an unfortunate end to a business venture for directors, who may have put much time and effort into trying to make it a success.

Staff redundancies

Unfortunately, all staff are made redundant when a company enters Creditors’ Voluntary Liquidation. If the company is unable to make the required redundancy payments, which is often the case with insolvent liquidations, employees can make a claim from the National Insurance Fund (NIF).

Danger of personal guarantees

If directors have provided personal guarantees for any of the company’s borrowing, lenders will expect repayment according to the terms and conditions of the loan. This could place directors’ personal finances at risk - if they can’t pay, lenders will pursue them through the courts.

Public process

When a company enters Creditors’ Voluntary Liquidation, a public notice is placed in the Gazette. This can damage a director’s business reputation in some cases, although less so when compared with compulsory liquidation as the directors have placed creditor interests first.

If you would like more information on Creditors’ Voluntary Liquidation, and whether it’s the right procedure for your company, please contact our expert team at UK Liquidators to arrange a free same-day consultation. We’ll ensure you understand the process, including the advantages and disadvantages of a CVL, and work from a broad network of offices nationwide.