What are the advantages of a CVL for Directors?

Stress and pressure accumulated from creditors and banks will be transferred over to the Insolvency Practitioner. All communications with creditors and other stakeholders will go through the Insolvency Practitioner rather than the directors. By implementing a CVL, any worries around wrongful trading will be stopped. Any employee or lease liabilities will be automatically terminated. There are often long term contracts or leases which have been obtained by the company which aren’t being paid for. Using a CVL will terminate all these contracts and stop the payments for the products which often are depreciating in value. Employees will be able to claim redundancy from the government. As a director, you are no longer responsible for paying their wage or any payments regarding employees. Directors have more control. By instigating the CVL, the directors are able to choose a proposed Insolvency Practitioner with whom they want to work with. Low fees for directors. The only payment needed by directors is the costs of pre-appointment actions

What are the disadvantages of a CVL for Directors?

The company will have to stop trading altogether. It will no longer be able to continue to be a company and you will have to stop being it’s director. There will be restrictions with the use of the same name of starting another company. The operation of the business from the directors has to be investigated by looking at ow the directors operated the business affairs. There are many steps to the process, especially within the first 28 days where meetings with directors, shareholders and creditors must be attended. This can often be seen to be slightly disruptive and time consuming. There is also no opportunity to buy the business back until after the meetings have been held. After this, there is no guarantee that directors will be able to get the business back as someone else may come in and buy the assets instead. Therefore there is the risk that the directors will not be able to get the business back and lose it forever- directors therefore must be sure that using a CVL is the correct process for them.

What is the role of a liquidator in the CVL process?

Identify, secure and realise all physical assets as well as monies and claims due to the company Investigate all transactions undertaken by the company and its directors in the 2 years prior to liquidation. This is to ensure no acts of misfeasance have been conducted by directors. Liquidators have a legal obligation to investigate such actions. Carry out a report on both director’s and shadow directors conduct in managing the company Investigate whether the directors have carried out their fiduciary duty to the company (their duty to always act responsibly and in the best interest of the company and its creditors). If this can be shown to not be the case the liquidator may pursue a monetary claim against a director for losses suffered by the company Identify and agree on creditors’ claims and, where there are funds available, paying out of dividends to creditors.

Complete Guide to Creditors Voluntary Liquidation (CVL)

This guide seeks to answer the many questions that directors have when considering whether they could liquidate their company.

Chamberlain & Co have been established for over 20 years and liquidations have been a core service line throughout. We aim to make the process as stress free as possible, whether this is a straight forward company closure or part of a larger restructuring strategy.. We have a team of award winning dedicated professionals who specialise in insolvency, restructure, rescue and business turnaround. We are an established service provider within our sector and nationally.

Welcome to the Complete guide to Creditors Voluntary Liquidation (CVL) by Chamberlain & Co. We have a team of dedicated professionals who specialise in the field of business recovery and have become an established service provider within our sector both regionally and nationally. We hope you find this guide useful to explain the CVL process.

When should I stop Trading?

One of the big questions that directors often find asking themselves is whether their company is insolvent? And if not, should they cease trading now?

To answer these critical questions, directors should conduct a series of tests. These have been broken down below into the legal and practical tests.

Legal tests

The Balance sheet test

To carry out this test, directors should analyse whether their liabilities exceed their assets. If this is the case, the company is balance sheet insolvent and therefore the director should be asking the question whether their company can continue to be viable.

The Liquidity test

In order to conduct the liquidity test, directors must evaluate whether the company is able to meet their liabilities as they fall due. If they are not able to do so, the director should look to seek advice and guidance.

Practical tests

In addition to the legal tests, directors can also take practical steps which give indication that their company is insolvent. These can be used for directors to pin point a point in time where the company begins to become insolvent. Conducting these tests may prove to be beneficial in the future as they provide documentation that tests were carries out.

A few of the steps that directors can take include-

Receiving solicitors letters for demand from suppliers
Bouncing cheques or payments from bank accounts
Receipts of CCJ or statutory demands

So if your company is under a lot of pressure from creditors for not paying debts on time, receiving court orders and struggling to pay liabilities on time, then it is probably insolvent.

If you find yourself in this situation, the best course of action is to seek advice now- the earlier you speak to the experts, the probable recovery will be.

If a company fails a test, will they be insolvent forever?

The solvency of a company is quite fluid. It is not a case of when a company becomes insolvent at one point in time that they are so forever- fluctuations in insolvency are very common.

This is because future work and projects or having the capacity to liquidate assets into cash may improve future projections of the company. Therefore, these extra cash inflows will help to improve the profitability and cash position and boost the company towards being solvent again. So if the company is insolvent now, this may change going forward if the correct measures are implemented.

What happens if the company is insolvent?

Case law states that when a company becomes insolvent directors must prove that they have taken every step to minimise potential loss to creditors. The big question here is- should the director ought to have known their company was entering insolvency?

The thing to consider here is the projections and actions which have been taken by directors. If directors have taken the tests, shown they are insolvent but then continued trading, they must prove that future projections of the company imply that the position of the creditors would be improved by doing so.

On the other hand, directors could also be criticised for ceasing trade too early. If they believe they are insolvent at a particular point, but they know things are going to improve and get better it may be seen negatively to stop trading immediately as it may worsen their position for creditors. This is because they haven’t concentrated on completing the actions which would ultimately put the creditors in a better position and minimise their loss.

Therefore, the most important thing is for directors to document every action taken to prove the rationale behind the decisions being made.

Remember, if a director is found to continue trading whilst insolvent and not attempting to minimise the loss to creditors, they may be accused of wrongful trading. This has serious consequences for directors, including disqualification.

Therefore, the best thing directors can do is to take advice early. Every case is different and therefore by getting expert advice, the specialists will give you detailed guidance which is specially tailored to your firm.

Wrongful Trading

After a company becomes insolvent, it is the director’s duty to act reasonably and do everything possible to minimise the loss to creditors. Failure to doing so can result in directors being accused of Wrongful or Fraudulent Trading, which are both covered under Section 214 of the Insolvency act 1986. If these accusations arise, a thorough investigation will be conducted on directors.

Wrongful Trading can only arise when the company is facing liquidation or any procedure which results in the closure of the company. Therefore it cannot occur in procedures such as Company Voluntary Arrangements, Trading out or Refinancing.

When directors do not show they are following their duties by limiting creditor’s exposure to debts when insolvency occurs, they can then be accused of wrongful trading. This shows the importance as to why all decisions should be documented at the time they were made. It is much easier to give a clear justification behind the rationale of actions taken when you have all the information at hand. If directors attempt to retrospectively justify these decisions at a later date, it becomes much more complicated and difficult to do so.

This documentation provides evidence that you acted in good faith for the creditors

Penalties for Wrongful Trading include potential disqualification, being held personally responsible for company debts and other financial fines.

Fraudulent Trading

In addition of wrongful trading, directors must also be aware of fraudulent trading. This is a very serious accusation in which directors deliberately attempt to put the creditors in a worse position by defrauding or denying them of what they are owed.

A thorough investigation will take place by the Insolvency Practitioner if Fraudulent Trading is suspected, which will be passed over to the Secretary of State.

These allegations are taken very seriously and penalties include directors disqualification, financial penalties and in extreme cases imprisonment.

COVID-19

At the moment, due to the Coronavirus pandemic, the government have amended insolvency law to allow breathing space for companies whilst they are facing uncertainty and financial difficulties. They are allowing companies to continue trading by placing a suspension on wrongful trading. However directors must take extra precaution as there are many other regulations which have not been suspended which directors may get caught out on.

Even though the suspension may provide a welcome relief for directors, it will eventually come back into effect and therefore will not provide a long term solution.

If you have any doubt or worries around how COVID-19 is affecting your business, it is essential to get advice as soon as possible to ensure you are implementing the correct steps for your company.

If after reading this section you are worried about Wrongful or Fraudulent Trading, give us a call on 0113 242 0808 or e-mail advice@chamberlain-co.co.uk.

Choosing the correct pathway

When a company faces financial difficulties, there are several pathways which can be explored depending on the outcome the director is trying to achieve and the current financial position of the company.

These include:

When you meet with an Insolvency Practitioner, you will go through all the possible available courses of actions. You will be given clear guidance and advice on which pathways is the most suitable for your objectives along with minimising losses to creditors. Together, you will formulate a solution which maximises the interests of all parties involved.

It is not the case that one rigid pathway must be chosen. It is often beneficial to use more than one process to optimise the outcome of the company and therefore it is possible to implement several simultaneously.

When initially meeting with an Insolvency Practitioner, you will sit down and plan the pathway together with 3 simple steps:-

Where is the company now? What is the current situation of the company and how did it end up where it is?
As a director, what is the position you want to get the company into? What are your objectives and what do you want to achieve?
What is the best way to get from now to the objective whilst maximising the realisation of assets to creditors?

Often when the company becomes insolvent, the directors believe the only solution is to implement a liquidation process. However this is often not the case. By taking advice from an Insolvency Practitioner, they can help to find a structure for the company which potentially allows it to stay alive and flourish again.

Insolvency vs Solvency

If a company is not currently insolvent and there are opportunities for further trade to allow the company to survive, the first essential step is to talk to an Insolvency expert.

They will be able to help you seek out the viable core of the company and find the best way to extract and optimise it through different restructuring techniques.

These include:-

Renegotiations with suppliers
Focusing on the viable successful core of the business
Injections of capital
Payment plans
Restructuring of employees

However if the director feels they company is not viable and wishes to close it down, then a Members Voluntary Arrangement can be used.

When the company becomes insolvent, the duty of the directors drastically changes. They must do everything they can to ensure company debts do not grow and they are acting in the best interest of the creditors.

Often directors believe that they will be able to use restructuring techniques to trade their way out of insolvency. However extra caution should be taken to ensure accusations of wrongful trading do not arise. Therefore the first port of call is to talk to an insolvency specialist before making a decision.

If, after talking to an Insolvency Practitioner, you decide that the company is insolvent, not viable and there are no restructuring options which can be used, a CVL should be implemented. By doing this, directors will be choosing to close down the company and cease trading.

What happens in a CVL?

After a CVL has been implemented, the Insolvency Practitioner will take care of all the necessary steps to close the company down.

Even though the Insolvency Practitioner will take care of all the necessary steps, the director has a duty to hand over all relevant information and assist them wherever is necessary.

They also have a duty to inform all shareholders that the company has become insolvent and the reasons as to why.

Remember, after a company becomes insolvent, the director has a duty to minimise the loss of creditors- failure to do so has serious consequences

Simple step-by-step Guide

Below is a simple outline of the CVL process. For a more detailed step-by-step guide please see the complete guide to CVL’s.

Step 1-Directors meeting

If, after an initial consultation with a professional, the directors decide to implement a CVL, they must choose a nominated liquidator to start the process. All details of the company should be given to the proposed liquidator so they understand how best to move forward with the process.

Step 2- Board meeting

A meeting with all shareholders will then take place, during which the Statement of Affairs will be presented along with an analysis of the company’s financial position. The shareholders will then agree whether implementing a CVL is the best option and if so, the company at this point will officially be in a CVL.

Step 3- Creditors meeting

The creditors will then be informed of the company entering into a CVL during the meeting of creditors. During this meeting, the company’s financial position will again be discussed along with the statement of affairs. The liquidator’s fees will be explained, discussed and approved by the creditors. In order for the proposed liquidator to be appointed, the creditors must ratify the director’s nomination. After this is approved, the liquidator will be appointed and awarded all necessary powers for the liquidation to take place.

Step 4- Handover

From this point, all communications with creditors and company affairs will be managed by the liquidator. The director will not have to contribute to the running of the liquidation but will have to assist with any information needed. It is a legal requirement that an investigation is also conducted to ensure no wrongful trading or other breach of directors’ duties has been violated.

Step 5- Asset realisation

The liquidator has a duty to ensure the funds available for creditors equates to the maximum amount possible. Therefore, they will sell or dispose of assets in the best way possible to achieve the highest amount which can be obtained. After the realisation of funds from the assets, the liquidator will distribute the available funds to creditors.

Some legalities

Reuse of the company name

When wanting to set up a new company after becoming insolvent, most directors are satisfied with using a brand new company name. This is the easiest and safest option when directors wish to start trading with a new company.

Legally, under section 217 of the Insolvency Act 1986, you are unable to use a name which is associated with the one used previously.

However, there are exemptions which can be used in order to set up a new company with the old company’s name, but these can often be quite complex and timely.

These include:

The new company with the associated name has been trading at least 12 months prior to the appointment of the liquidator.
A court application approves of such name. This is normally done when a director has bought the name off the liquidator who is dealing with the process.
By buying the business from the liquidator

Transactions at Undervalue

Directors need to be mindful of the price that they are selling assets. It can be very tempting, when the company is facing financial difficulties, for directors to sell assets cheaply in return for a quick sale.

However, when a director sells an asset to someone at a considerably lower value than its true value, the sale is known as a Transaction of Undervalue.

If the sale is conducted anytime from 5 years prior to the point that the company become insolvent, or if the transaction causes the company to become insolvent the liquidator can apply to the court for the transaction to be reversed.

By implementing the transaction, the director is breaking their conduct of duty by failing to minimise the loss to creditors- by selling the asset at its true value, creditors will get higher returns and therefore fewer losses.

Therefore, it is important to talk to an insolvency specialist before selling any assets which you think may risk being a Transaction at Undervalue.

Preference

Directors have a duty to minimise total losses to all creditors and therefore must treat them all equally. The problem arises when the director puts one creditor in a better position than another. When this occurs, it is known as a preference.

If the payment is given to an associated creditor, a preference is presumed. Additionally, if the payment was given within 2 years prior to the company becoming insolvent, this is also classified as a preference.

When it comes to payments to creditors when the company is insolvent, directors must be aware and cautious to treat all parties equally and to minimise the loss overall to creditors.

Misfeasance

When the company is solvent, directors have a duty to act in the best interest of the company and promote its success.

However this duty changes when the company becomes insolvent. When insolvency arises, directors must act in the best interest of its creditors by minimising their loss.

Any form of action taken by the creditors which is seen to be a breach of this conduct is referred to as misfeasance, including the examples given above. Sometimes, when a company goes into liquidator the director will be accused of misfeasance by deliberately putting the creditors in a worse position

A role of the liquidator is to investigate the reason as to why the company failed and therefore they will look into whether they believe any misfeasance was conducted.

Even though in most circumstances it is the liquidator who will raise a claim of misfeasance, it is not limited to them. Any shareholder, creditor, official receiver or individual involved in the company can make a claim.

The most important thing to do as a director is to document every decision and action made, with a clear rationale behind them. This way, you will be able to provide evidence and give a clear explanation of actions taken if accusations of misfeasance occur.

If you are worried about any of the issues discussed in this section, give us a call on 0113 242 0808 or e-mail advice@chamberlain-co.co.uk.

Overdrawn Directors Loan Accounts

Often, rather than drawing a salary or wage from the company, accountants advise directors to take drawings from the company’s bank account as a way of saving tax.

At the end of the year, the directors will review the financial information of the company to assess the profitability of the company. Whilst profits are being made, it is acceptable for directors to take out the money from the company account as a dividend.

However, the problem arises when the company becomes insolvent. If the company becomes unprofitable, directors

When the company stops making profit, directors are obliged to stop taking money from the company. The amount taken out by directors whilst the company was unprofitable is known an overdrawn directors loan account.

The directors will be personally responsible for paying the corresponding amount on the overdrawn account back to help with realising funds for creditors.

If these funds are not paid back to the company, the liquidator can take legal action against directors, including petitioning for their bankruptcy.

What if this causes me to face personal financial difficulties?

Often directors find themselves having to pay back large amount of funds to the company due to overdrawn directors loan accounts and personal guarantees. Therefore, they too may have to take advice regarding personal insolvency.

Here at Chamberlain & Co we specialise in both company and personal insolvency. So if you are worried about your own personal financial situation, talk to one of our Insolvency Practitioners today.

Director FAQ’s

Will liquidating my company affect my personal credit rating?

The company debts and personal debts are initially seen as being completely separate. Therefore when placing your company into a Creditors Voluntary Liquidation, your personal credit rating will not be affected.

However, this changes when there are personal debts from the directors to the company. For example, if you have personal guarantees for the company or taken loans out of the company accounts, then these funds will need to be collected. If these personal debts are not paid back to the company, your personal credit rating will then be affected.

Will I lose my house from company debts?

Again, as a general rule, you will not be affected personally by the company debts. Personal problems will only arise when there are personal debts due to the company.

Arrangements will need to be made with the Insolvency Practitioner to pay these back. However, often directors struggle to make the funds available to clear their debts off, which is when problems arise. The best thing to do at this stage is to get specialist advice from an Insolvency Practitioner.

In extreme circumstances, a bankruptcy petition may be made against you and this is when your personal assets, such as your house, will be taken into account towards your debt.

Will I become liable to the debts of the company?

Following from before, you will only become liable of the debts of the company if you owe the company money. This can be through personal guarantees and also directors loan accounts.

Will I be able to be a director again?

Yes. When your company has been shut down using a Creditors Voluntary Liquidation, you are able to set up a new company with a new company name.

However, this becomes more complicated if you are thinking about setting up a new company with the same name. For more information please see the section on Reuse of the company name.

Will the Liquidation be advertised?

It is essential that a notice of the company going into a CVL is advertised in the London Gazette. The liquidator will then consider whether an advert will need to be placed elsewhere. However, the advertisement is not usually extended elsewhere.

Will I be required to do anything whilst the company is in liquidation?

As a director, you have a duty to assist the liquidator as and when you are needed. A director’s questionnaire will be required to be completed and all books and records will need to be handed over to the liquidator.

You will need to comply and cooperate with the reasonable requests of information whilst the investigations are being conducted and assist the liquidator with regards to the collection and realisation of assets. Even though you will have no responsibility for the day to day running of the business or decisions, you will need to assist the office holder to be able to carry out their functions to the best of their ability.

Am I able to claim a redundancy payment?

Yes! Directors are able to receive a redundancy payment in line with their period of service contract. As well as redundancy payments, directors can also be entitled to holiday pay and arrears of wages.

You also may have a longer period of service than you originally think. If you worked as a sole trader before you incorporated the company, you can include this period of time too.

Will someone be able to buy my business after it has been liquidated?

The competitors are the most likely to want to pay the most for the assets as they know the business the most and will estimate the predicted revenue the most accurately.

The liquidator has a duty to maximise the funds available for creditors. Therefore they will sell the assets to those individuals willing to pay the most for it. Generally, the company competitors will often be willing to pay the most for the company’s assets as they are likely to understand the business the most and will estimate the predicted revenue the most accurately. Therefore, the company’s assets are often sold to them. However as a general rule, the assets will be sold to those willing to pay the most.

Do I have to bring my accounts up to date?

As a director, you have a duty to provide all the books and records to the Insolvency Practitioner. These records must be up to date and include all the relevant information.

Do I need to ensure my PAYE and VAT returns are up to date?

Yes- as a general rule, Insolvency Practitioners will request for these to be fully updated to ensure the process is as smooth as possible.

The VAT return can be a very material part of the Statement of Affairs and can be seen as a huge unquantified tax that hasn’t been accounted for.

This is also important because when conducting the director’s disqualification submission, the Insolvency Practitioner is obliged to answer whether there is a material difference between the Statement of Affairs and the claims that they subsequently received. Not providing up to date VAT and PAYE returns can impact this difference and therefore can be seen to be a negative on the director’s conduct.

Advantages and Disadvantages of a CVL for Directors

Pros

Stress and pressure accumulated from creditors and banks will be transferred over to the Insolvency Practitioner. All communications with creditors and other stakeholders will go through the Insolvency Practitioner rather than the directors.
By implementing a CVL, any worries around wrongful trading will be stopped.
Any employee or lease liabilities will be automatically terminated. There are often long term contracts or leases which have been obtained by the company which aren’t being paid for. Using a CVL will terminate all these contracts and stop the payments for the products which often are depreciating in value.
Employees will be able to claim redundancy from the government. As a director, you are no longer responsible for paying their wage or any payments regarding employees.
Directors have more control. By instigating the CVL, the directors are able to choose a proposed Insolvency Practitioner with whom they want to work with.
Low fees for directors. The only payment needed by directors is the costs of pre-appointment actions

Cons

The company will have to stop trading altogether. It will no longer be able to continue to be a company and you will have to stop being it’s director. There will be restrictions with the use of the same name of starting another company.
The operation of the business from the directors has to be investigated by looking at ow the directors operated the business affairs.
There are many steps to the process, especially within the first 28 days where meetings with directors, shareholders and creditors must be attended. This can often be seen to be slightly disruptive and time consuming.
There is also no opportunity to buy the business back until after the meetings have been held. After this, there is no guarantee that directors will be able to get the business back as someone else may come in and buy the assets instead. Therefore there is the risk that the directors will not be able to get the business back and lose it forever- directors therefore must be sure that using a CVL is the correct process for them.

CVL Fees

Conveying Fees

Implementing a CVL is a quick and cost efficient method for directors to close down the company when it becomes insolvent.

The only fees involved for directors are those incurred from pre-appointment actions of the liquidator. This involves assistance with the preparation of a Statement of Affairs and in seeking a decision of the company’s creditors over the nomination of a liquidator. Also, the liquidator will assist with gathering information for creditors on the company’s financial position. This information will need to be handed over to creditors during the creditors meeting.

The fees involved will be on a case-by-case basis and are expected to be proportionate to the complexity of the company’s affairs. The fee will also be dependent the number of creditors which are involved.

Hopefully the asset realisations from the company will meet these costs. However, in the event of these being insufficient (or if it is expected that they will be insufficient), the Insolvency Practitioner is likely to ask the directors or shareholders to personally undertake any shortfalls.

Liquidator’s Remunerations

In order for a CVL to be implemented, there must be a meeting of creditors and shareholders. At this meeting a resolution of fees based on time spent on the liquidation must be discussed and approved by all parties involved. When the creditors agree to this, the CVL can then be formally started.

The proposed liquidator is required to provide a fee estimate based upon an explanation of the work that they anticipate will be needed to identify, secure and realise all assets.

Additionally, the fees will include time spent on establishing and paying creditors and they will also need to explain any likely disbursements.

If new matters or information come to light and therefore more work needs to be carried out to complete the liquidation process, the fee estimates may need to be updated and adjusted so they are aligned.

The Liquidator

Role and Duties

When the liquidator is appointed to implement the CVL, they have a duty to maximise the realisation of assets to creditors.

The liquidator will carry out all the appropriate steps to ensure the company is liquidated in the most effective way to benefit the creditors.

Their role is to include the following:

Identify, secure and realise all physical assets as well as monies and claims due to the company
Investigate all transactions undertaken by the company and its directors in the 2 years prior to liquidation. This is to ensure no acts of misfeasance have been conducted by directors. Liquidators have a legal obligation to investigate such actions.
Carry out a report on both director’s and shadow directors conduct in managing the company
Investigate whether the directors have carried out their fiduciary duty to the company (their duty to always act responsibly and in the best interest of the company and its creditors). If this can be shown to not be the case the liquidator may pursue a monetary claim against a director for losses suffered by the company
Identify and agree on creditors’ claims and, where there are funds available, paying out of dividends to creditors.

What are the difficulties that the liquidator may face?

When the liquidator takes control of the company and implements the CVL, they can often be faced with some difficulties. This can make the process much longer and complex than originally thought.

Some of the problems that may arise for liquidators include:-

Insufficient records to establish the company’s ownership of assets and rights to realise payments and legal liability for indebtedness.
Customers may seek to avoid payment of balances due to a company in the absence of comprehensive signed delivery notes, invoices.
1. Directors should carefully maintain and retain and pass all such documents and any signed contractual documentation to the prospective liquidator
2. They should provide information on the terms on which the stock and other goods have been supplied, to alert the proposed liquidator to any potential retention of title claims available to creditors trying to recover goods supplied.
3. Directors should alert the liquidator to any claims against the company which are disputed and provide documentation evidencing the validity of the disputes.

Remember, the best thing for everyone when a company is being shut down is for the director and liquidator to work together. By creating a strong relationship, you can formulate the best outcome for everyone involved- including you as a director.

Summary

We appreciate that this guide contains a lot of information to take in. The liquidation option needs to be considered alongside the other potential options for your company such as Company Administration, Company Voluntary Arrangement (“CVA”), Compulsory liquidation/compulsory winding up, Strike off/dissolution or accelerated sale/merger. To be expertly guided through these different options for your own particular circumstances, email or call to have a free, no obligation consultation.

Now that you have read the guide please feel free to look at our CVL services and if you require any further information regarding the consultation or any of our other services, give us a call on 0113 242 0808 or e-mail advice@chamberlain-co.co.uk.