There are advantages to a viable but insolvent business being saved through the creation of a Phoenix Company, but there...
Choosing Creditor’s Voluntary Liquidation over Compulsory Liquidation
Business Insolvency can be a tough pill to swallow. Acknowledging that there may not be a way to recover a business you’ve put your heart and soul into building especially so. When faced with the inevitability of closing your business, it can be tempting to just try to keep going until forced into compulsory liquidation, but in almost all circumstances choosing Creditor’s Voluntary Liquidation is a far better option.
What is Creditor’s Voluntary Liquidation?
When a business is at a point where insolvency makes liquidation inevitable, a Creditor’s Voluntary Liquidation (CVL) is a means of closing the company initiated by the Directors. Following this decision, the company will cease to trade and a process will begin which results in all the assets of the business being sold and the proceeds and the assets from the sale distributed to the people and business to which it was indebted. This distribution will be based on the hierarchy of creditors in the situation where there isn’t enough to pay everyone in full.
Following the Creditor’s Voluntary Liquidation (or any liquidation), an investigation will take place into the affairs of the company and the reason behind its demise and once all affairs are finalised, the company will be dissolved and as such cease to exist.
Why Choose Creditor’s Voluntary Liquidation?
There are several good reasons to choose Creditor’s Voluntary Liquidation over Compulsory Liquidation and for the most part they boil down to control of the process and a Director liability for his or own conduct. Following are points to consider;
- When a company is liquidated voluntarily, the Director’s are able to retain a degree of control over the process. As well as being seen to make a positive, pro-active and responsible choice (which will be looked on favourably when the liquidation is investigated), they are also able to select the Insolvency Practitioner who will manage the liquidation.
- If company becomes insolvent it must cease trading, to do otherwise would be against the law and the Limited status of a company only provides protection for Directors who follow the rules. A director who allows an insolvent company to continue to trade could therefore, amongst other sanctions, be held personally liable for company debts when compulsory liquidation eventually forces it to close.
- The Director of a Limited company is obliged to act in the best interests of the company under most circumstances, but if a company becomes insolvent they must then act in the best interests of the creditors. Allowing an insolvency get to the point where compulsory liquidation takes place is unlikely to be in the best interests of either group and as such the Director who acted against those interest (or whose inaction failed to protect those interests) may be held accountable.
- The cost of a Creditor’s Voluntary Liquidation is often cited as a reason for inaction, but the fees charged by Insolvency Practioner’s for managing the company liquidation is paid out of the liquidated assets of the company itself, so the Directors, if they have behaved appropriately, will not have to pay directly.
How Do I Arrange a Creditor’s Voluntary Liquidation?
A Creditor’s Voluntary Liquidation can only be overseen by an Insolvency Practitioner. At Lines Henry, we pride ourselves on achieving the best outcomes for the businesses and individuals who come to us in their time of fiscal need. We’ll assess your options and make our recommendations based on our decades of experience. We take a holistic approach and offer a free consultation to get the process started, so there’s no reason not to contact us as soon as you realise you need help and find out what to do next.