Creditors Voluntary Liquidation is when the shareholders decide to fold the company because it doesn’t have the sufficient assets to cover its debts. The business normally decides to enter Creditors Voluntary Liquidation when it deems that it can no longer trade and it wants to settle its outstanding debt as soon as possible.
If the company is solvent the process is reasonably straight forward, however most businesses choose this option because they are insolvent. It is also possible, but complicated to fold the old company, pay off the debts and then transfer the remaining assets to a new company who will trade in a similar way to the old company. This is called opening a phoenix company.
The process of Creditors Voluntary Liquidation
A company might choose Creditors Voluntary Liquidation when it is insolvent and it deems that there is no possibility of recovery.
To initiate this process the directors call a meeting of the shareholders and explain that the company is insolvent and unable to cover its debts, therefore it would be wrong to take further credit from its creditors. The Directors and shareholders then decide to proceed with Creditors Voluntary Liquidation and at this point the business with normally cease trading.
Once it has been agreed to enter into the process, a liquidator will then be appointed. A liquidator is an insolvency practitioner who has been brought in to manage the process. Their first task will be to call a meeting with the creditors to explain the situation. The creditors needs to formally appoint the liquidator to manage the process, they may also form a committee to oversee the process. The liquidator will then work to convert the businesses assets into cash, paying the creditors is their priority.
Company directors have a responsibility to their creditors and it is unethical to shut down the company and leave the debts unresolved. This can also lead to prosecution under ‘Wrongful Trading’, if it is proven Directors can be personally liable for the charges.
If your business is insolvent it doesn’t mean that you have to enter into Creditors Voluntary Liquidation, if the directors consider that the business is viable and it is possible to turn it around, it does not need to cease trading. If this is the case the business needs to take immediate action to become solvent as soon as possible. It could consider entering into administration or a voluntary arrangement.
Getting advice from the professionals
Before entering into any insolvency process it is a good idea to get some advice from the professionals. They may be able to offer solutions or possibilities that you have not considered.
To understand the whole range of options and to get help choosing the right one for your business contact us on 0800 597 4757 or enquire online using the form opposite.
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