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Published on 21 December 2010 by Tony Groom
Creditors Voluntary Liquidation (CVL)
Creditors’ Voluntary Liquidation is a process by which the directors of an insolvent
company can close it down without involving a court procedure.
There are four tests of insolvency laid down in the Insolvency Act 1986 and any one
of the four tests can be used to determine whether the company is insolvent.
The tests are that the company has failed to pay a judgement debt, or deal with a
statutory demand, the cash flow test and the balance sheet test. The most common
is the cash flow test defined by whether or not the company can pay its liabilities on
time.
Insolvency does not necessarily mean that a company should be closed down, but
depends crucially on whether or not continuing to trade will enable the company to
emerge from insolvency and will improve the position for creditors. In addition to
trading out of the insolvency, there are a number of options, using formal and
informal restructuring procedures, for avoiding liquidation. These would normally be
incorporated in a rescue plan that would be developed by an insolvency
practitioner or rescue adviser.
If the company does continue to trade, the directors should seek professional advice
as they have a legal obligation to act in the best interests of the company’s creditors
and if it should turn out that the company eventually does have to be closed down
they will need documented proof of this. Failure to follow strict guidelines for trading
while insolvent can lead to the directors becoming personally liable for the
company’s debts if it does have to be closed down.
K2 Business Rescue
The Emergency Service for Business
Call Tony Groom on 0844 8040 540

2. In the event that the directors conclude, with or without advice, that the company
should be closed, they can then use the formal process called Creditors Voluntary
Liquidation to wind up the company in an orderly fashion.
The CVL procedure is defined by the Insolvency Act 1986. It involves a board
meeting at which the directors formally agree that the company should cease to
trade. The next step is to seek shareholder consent. While this might be
straightforward for a very small company with shareholders consenting to a short
notice meeting, larger ones can be more complicated. At least 75% of the
shareholders must approve the directors’ proposal that the company be placed into
liquidation and at least 50% must approve the nominated liquidator. The
shareholders may however disagree and wish to appoint new directors to save the
company. In practice the directors normally sound out shareholders before
convening the meeting.
Documents must be prepared including Statutory Information on the company, a
history of the business, historical financial information of the company, deficiency
account, a statement of affairs and a list of creditors.
The directors must first have members’ (shareholders’) support for the closure so a
meeting has to be called in accordance with the company’s Memorandum and
Articles, which define the length of notice they must be given, usually 14 days.
At the meeting the members (shareholders) are asked to pass a resolution to close
the company by a vote of more than 75% and to appoint a properly licensed
liquidator to manage the process and ensure it is all carried out correctly.
A meeting of creditors is also convened under section 98 of the Insolvency Act 1986 –
this requires giving them at least seven days’ notice (excluding time for postage). The
creditors meeting involves confirmation of the nominated liquidator or appointing
the creditors’ own nominee who will need approval by at least 50% of the creditors.
All nominated liquidators must be licensed insolvency practitioners who have
provided consent to act. This consent must be available for inspection at the
meeting. In practice, such consent is normally only provided once the nominated
liquidator is satisfied about his/her fees. The creditors, at the meeting, may also
nominate a creditors committee that must comprise of three or five creditors
appointed by them to assist the liquidator and to represent them by overseeing the
conduct of the liquidation.
Preparation for meeting involves the directors producing a statement of affairs which
is a prescribed format document that shows asset realisations and any creditors who
have a claim over them. It makes assumptions about the value of realisations from
the sale of assets and includes all creditors, trade, HMRC, finance, employees and
contingent creditors that will crystallise due to termination of contracts. The directors
must also produce a history of events to explain the circumstances that led to the
company becoming insolvent.
K2 Business Rescue
The Emergency Service for Business
Call Tony Groom on 0844 8040 540

3. Normally the directors would engage an insolvency practitioner or solicitor to help
guide them through the above process and administer the sending out of notices so
that the procedure is done correctly.
Following appointment the liquidator has a number of duties to perform. They must
deal with assets which are normally sold, they must access creditors’ claims and then
they must distribute surplus cash to creditors following a strict order of legal priority.
They also have a duty to investigate the accounts and activities of the company
and in particular look at the transactions prior to the company be placed into
liquidation. Having done this they report to the Insolvency Service on the conduct of
the directors with a view to pursuing them in the event of personal liabilities and
disqualifying them in the event of a failure to discharge their duties correctly.
The advantage of a CVL is that it is a very efficient procedure with the liquidator
taking over responsibility for dealing with creditors and closing down the company. It
also has the benefit of demonstrating that the directors were responsible in carrying
out their duties by them taking steps to close down the company in an orderly
manner when they believed it should cease to trade.
We are not Insolvency Practitioners. We operate within the law to protect our clients and their wealth.
Our team has worked for over 20 years to help stabilise and return hundreds of businesses to
profitable growth. Once appointed, Insolvency Practitioners do not work for you, they work for creditors
and use your company’s assets to pay themselves. We work for you, not creditors.
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K2 Business Rescue
The Emergency Service for Business
Call Tony Groom on 0844 8040 540