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What are the advantages and drawbacks of a Creditors Voluntary Liquidation (CVL)?

Quick answer

A CVL can provide a formal way to close a company that cannot pay its debts and is no longer viable. It can help by taking the process out of day-to-day firefighting, putting a licensed insolvency practitioner in charge, and dealing with the company’s debts and closure through a proper legal process. However, a CVL also has drawbacks, including the company being closed, possible employee redundancies, and some personal liabilities may still remain.

In full

A CVL can be the right option where an insolvent company needs to be closed properly, but it is important for directors to understand both the potential benefits and the drawbacks before moving forward. The right option will always depend on the company’s circumstances.

Advantages of Creditors Voluntary Liquidation (CVL)

  • A formal and orderly way to close the company
    CVL allows directors to formally wind up an insolvent company with shareholder approval, leading to the write-off of unsecured debts. This process provides a clear end to the company’s existence and financial obligations.
  • Possible business continuity through a sale of the business or assets
    In some cases, the business or its assets may be sold, including to a new company connected to the former directors. Where that is possible, it may allow trading to continue in a new structure rather than simply stopping altogether. Depending on how the sale is carried out, employees’ rights may also be protected under TUPE. However, this is not automatic, and any sale must be handled properly in the interests of creditors.
  • Directors are not automatically prevented from future business involvement
    A CVL does not automatically stop a director from acting as a director of another company in the future. However, separate rules can restrict the reuse of the same or a similar company name after insolvent liquidation unless an exception applies.
  • A licensed insolvency practitioner takes control of the process
    Once appointed, the liquidator takes control of the company and deals with the formal liquidation process. That can take some of the immediate pressure off directors and helps ensure the company’s affairs are dealt with properly.
  • Employees, and directors, may be able to claim certain statutory payments
    Employees made redundant in an insolvency may be able to claim matters such as redundancy pay, unpaid wages, holiday pay and notice pay. Some directors may also qualify, but only where they were genuinely employees as well as directors and meet the relevant criteria.

Drawbacks of a Creditors Voluntary Liquidation (CVL)

  • Overdrawn directors’ loan accounts remain repayable
    Directors may become personally liable for any overdrawn loan accounts when the company enters liquidation.
  • There may be restrictions on reusing the company name
    If a company goes into insolvent liquidation, there are restrictions for 5 years on a director being involved with a company using the same or a similar name, unless an exception applies or court permission is obtained.
  • Employee redundancy
    All employees will be made redundant when the company enters CVL, although they may have the opportunity to transfer to a new company under TUPE regulations and claim statutory entitlements.
  • Personal guarantees may still be enforceable
    A CVL deals with the company’s position, not separate personal obligations. If a director has signed a personal guarantee, that liability may still remain after the company enters liquidation.
Frequently asked questions

  • What is a Creditors Voluntary Liquidation (CVL)?

    A CVL is a formal insolvency process used to close an insolvent limited company. It is usually considered when a company can no longer pay its debts and there is no realistic prospect of recovery. For directors, a CVL can provide a structured way to deal with the company’s debts, bring creditor pressure to an end, and close the company properly with a licensed insolvency practitioner appointed to handle the process.

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  • What happens to employees in a Creditors Voluntary Liquidation (CVL)?

    When a company enters a CVL, employees are usually made redundant because the company is being closed. They may be able to claim certain statutory payments, including redundancy pay, unpaid wages, holiday pay and statutory notice pay, subject to eligibility and statutory limits. If the company cannot pay those amounts because it is insolvent, qualifying claims are usually made to the Redundancy Payments Service (RPS). In some cases, where the business or assets are sold and trading continues through another company, employee rights may be affected by TUPE, but that will depend on the circumstances.

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  • What are your duties as a director before, during and after a Creditors Voluntary Liquidation (CVL)?

    As a director of a company in a CVL, your main duties are to act carefully once insolvency is apparent, avoid worsening creditor losses, and cooperate fully with the liquidator.

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  • What happens to personal guarantees in a Creditors Voluntary Liquidation (CVL)?

    A personal guarantee does not usually fall away just because your company enters CVL. The liquidation deals with the company’s position, but a personal guarantee is your own separate promise to repay a debt if the company cannot. If you have signed one, the creditor may still be able to pursue you personally even after the company has gone into liquidation.

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  • Can I transfer employees to a new company after a Creditors Voluntary Liquidation (CVL)?

    Possibly. If you want to continue the trade through a new company, or through another company you already own, it may be possible for employees to move across with the business. That will usually depend on whether the business, or part of it, is genuinely being transferred and continuing in the new company. If it is, TUPE may apply and the employees connected to that part of the business may transfer with their existing employment rights. If not, the employees are more likely to remain with the old company and be dealt with through the liquidation instead.

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  • How much does a Creditors Voluntary Liquidation (CVL) cost?

    The cost of a CVL will depend on your company’s circumstance, there is not one fixed fee in every case. A smaller, more straightforward company will usually cost less to place into liquidation than a larger or more complex one. The fee reflects the work involved in dealing with the company’s affairs properly through a formal insolvency process, rather than simply filing paperwork.

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  • What happens when a company enters a Creditors Voluntary Liquidation (CVL)?

    When a company enters a CVL, it is placed into a formal insolvency process so it can be closed properly. A licensed insolvency practitioner is appointed as liquidator to deal with the company’s affairs, which may include gathering information, realising assets, notifying creditors, and bringing the company to an orderly close. For directors, a CVL provides a structured way to deal with an insolvent company where there is no realistic prospect of recovery.

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  • Can I buy back the business or assets after a Creditors Voluntary Liquidation (CVL)?

    Yes, in some cases it is possible to buy back some or all of the business or assets after CVL. However, this is not something directors can simply do themselves once the company enters liquidation. The liquidator manages this process, and any sale must be handled properly, at the right value. For directors, the practical point is that buying back the business or assets may be possible, but it has to be done through the liquidator and structured correctly.

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  • How long does a Creditors Voluntary Liquidation (CVL) take?

    A CVL can begin relatively quickly once the decision has been made and a liquidator is appointed. From that point, the company is in a formal liquidation process and the insolvency practitioner takes control of dealing with the company’s affairs, including its assets and creditor claims, so directors are no longer trying to manage those issues in the normal course of business. The full liquidation usually takes longer, because the liquidator must finish winding up the company’s affairs before the company can be dissolved. Once the final account is filed, the company is normally dissolved three months later.

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  • When should you consider a Creditors Voluntary Liquidation (CVL)?

    You should consider a CVL for your company when it can no longer pay its debts and there is no realistic prospect of recovery. This may be the case if HMRC arrears are building, creditor pressure is increasing, legal action has started, or the business is only continuing by delaying payments it cannot afford to meet. For directors, taking advice at this stage can help you understand whether a CVL is the right option and reduce the risk of the position getting worse.

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