Creditors Voluntary Liquidation

A Creditors Voluntary Liquidation or a CVL is a process by which company’s directors choose to voluntarily bring the business to an end by appointing a liquidator (who must be a licensed insolvency practitioner) and the company assets are sold.

At the end of the process, the company is dissolved.

Typically, a company goes into CVL after its directors realise that its liabilities exceed its assets or it cannot pay its debts as they fall due and so the company cannot carry on its business and this helps to differentiate it from a ‘winding up’ order in which the Court forces the business to liquidate.

The assets of the company must be realised, once it has entered into liquidation, and the funds raised will be distributed out to the Creditors.

It is possible that the assets can be sold to the director(s) of the existing company to enable them to create a new business going forward.

The benefits of a CVL:

  •  A quick and cost-effective way of formally closing down a company
  •  Outstanding debts are written off
  •  Ends pressure from creditors including any legal proceedings
  •  Provides a clean break and alleviates stress and uncertainty for company directors
  •  Enables employees and directors to claim redundancy and other entitlements from the Redundancy Payments Service
  •  Ensures compliance with duties as a director
  • Can minimise directors’ exposure to any wrongful trading action

 

Members Voluntary Liquidation

A Members Voluntary Liquidation or an MVL is a procedure to wind up the affairs of a solvent company.  It is used to close or wind up a company because the directors wish to retire, re-organise/restructure the business or because the company is simply no longer required.  Only a licensed Insolvency Practitioner can arrange an MVL.

The benefits of an MVL:

  • Low Cost – an MVL is quick and fairly cheap compared to other restructuring procedures. Tax savings normally outweigh the costs of the liquidation.
  • Tax Efficient – the liquidator has the ability to return funds to Shareholders as capital, which can have considerable tax advantages as distributions will be capital distributions and subject to Capital Gain Tax (“CGT”) rules rather than PAYE/NI or taxation rates for dividends. Directors who have been a director and shareholder of a company for at least 12 months (andwhere the company has traded in that period) can claim Entrepreneurs’ Relief which, when coupled with the personal allowance for CGT, can be extremely favourable when compared to higher rates of PAYE income tax.
  • Restructure/Diversifying Business Opportunities – a liquidator has the ability to restructure a business, perhaps using a hive down and to distribute assets (or shares in subsidiaries) in specie.
  • Dispute Resolution – An MVL can be used as a means of resolving a shareholder dispute as the company will no longer trade and when the liquidation is complete the company is dissolved.

 

Administration

Administration is a process available to insolvent companies to provide protection from itscreditors.

Essentially the procedure provides for the appointment of a Licensed Insolvency Practitioner (“the Administrator”) to give a breathing space for an ailing company or business during which options can be considered and proposals put by him to its creditors.

The purposes of administration are a hierarchy of objectives, as follows:

a. to rescue the company as a going concern, or if this objective is not achievable;

b. to achieve a better result for the company’s creditors as a whole than would be likely if it were wound up, or if this and objective (a) are not achievable;

c. to realise property to make a distribution to one or more secured or preferential creditors.

As a company’s circumstances are changing continually, which of these objectives can reasonably be achieved will be decided by the Administrator based on the circumstances that prevail on and following his appointment.

Dependent upon the circumstances, an Administrator may be appointed by one of the following:

1. Directors

2. Company

3. Qualifying Floating Charge Holder (secured creditor)

4. Creditors

5. Court (on application of one of the above)

An Administration can give rise to a pre-packaged sale of the company’s business and assets either to a third party or to existing management or Directors.

 

Company Voluntary Arrangement (CVA)

A Company Voluntary Arrangement (CVA) is essentially, an agreement between an insolventcompany and its creditors. This agreement places a legal ring fence, known as a ‘moratorium’, around the company and prevents creditors attacking it. This permits a viable but struggling company to repay some, or all, of its historic debts out of future profits, over a period of time to be agreed.

Directors stay in control of the company, with an insolvency practitioner providing the support and supervising the arrangement. It can stop legal actions like winding up petitions.  A company voluntary arrangement can also allow the opportunity for the business to be sold or to refinance.

A Company Voluntary Arrangement enables a company to obtain some breathing space from creditors to allow it to restructure by making proposals to any unsecured creditors to compromise their claims. A CVA will be approved provided 75% of those creditors, by value, vote to approve it.

In the Company Voluntary Arrangement proposal, a company should set out any potential outcomes should the CVA not be approved. Ordinarily, this would be that the company will enter into liquidation or administration, ending up with a much worse outcome for creditors receiving few pence in the pound rather than if the CVA was approved.

 

Restructuring/Rescue & Recovery

In the event that a company is experiencing some degree of financial distress but ultimately has a viable future, a pragmatic approach is always taken to ensure that all options are explored before a formal insolvency procedure is even contemplated.  This will involve considering:

  • Turnaround strategies
  • Restructuring options
  • Informal payment arrangements with creditors
  • Corporate finance options

We can advise on a full range of these options after carrying out an initial assessment of the business during a free consultation with one of our licensed insolvency practitioners.

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