Businesses that find themselves in extreme financial difficulty can need to go through a process called liquidation. A Creditors Voluntary Liquidation (or CVL) is one of several different insolvency processes available to companies that cannot pay their debts, one that holds a variety of benefits when used in the right situations.
How is the process started?
The CVL process starts with a resolution being passed by the company’s board of directors, which is then followed by a meeting of the company’s shareholders to decide if they approve of the decision.
If they approve, a professional service liquidator will take control of the assets owned by the company, selling them and distributing what’s left over to the creditors according to the legal priority.
What’s the purpose of a CVL?
As with any liquidation procedure, a CVL is to limit a company’s losses and pay back creditors as much as possible of what’s owed to them. It’s the duty of the appointed liquidator to ensure that the process is carried out in accordance with the law, making sure that repayment is carried out in legal order of priority.
What happens to the business?
During a CVL, the company in question must cease trading to allow it to be wound up as orderly as possible. Winding up the company will involve collecting all of its assets, including any cash, property, or inventory, and liquidating them. The business essentially ceases to exist, and the proceeds are then used to pay back the creditors, starting with secured creditors first and unsecured creditors last.
In the unlikely case that there is anything left over once the creditors have been paid back, the remaining assets will be distributed to the other company shareholders. However, if the company needs to go into liquidation, it’s unlikely that there will even be enough to pay back the creditors in full.
Why choose a CVL?
While a CVL looks similar to a lot of other liquidation processes, it can be a beneficial option to choose in many situations. As it’s voluntary, it allows the company’s directors to maintain some control over the situation, even if that control is limited. It also shows that they took proactive measures to remedy the situation, which can help limit the potential of legal action.
MVL vs CVL
It’s easy to get confused between the terms MVL (members’ voluntary liquidation) and CVL, however, they’re quite different for one main reason – that is, an MVL is generally carried out by solvent companies, to distribute assets between shareholders. As a result, each option will be used in very different situations.
Hopefully, that’s cleared things up a little, and you feel more informed about which liquidation solution will be best for your business. If you find yourself in this situation, it’s important that you choose a reputable liquidator – it’s your professional and legal duty, and choosing the right one can massively limit your exposure to legal liability in the future.