What is a Company Voluntary liquidation?
Voluntary liquidation is often referred to as creditors’ voluntary liquidation, CVL, business bankruptcy or simply just liquidation.
A CVL is not initiated by creditors nor HMRC but by company directors. This is also true of a Members Voluntary Liquidation (MVL); the difference being the MVL is for a solvent business whereas a CVL is for an insolvent business.
Sometimes a company is not able to trade out of cash flow problems and does not have enough money to pay its debts as and when they fall due. In these circumstances the company is insolvent and the only appropriate course of action is for the directors to cease trading and seek professional advice.
Voluntary liquidation is the most common way for directors and shareholders to deal voluntarily with their company’s overwhelming debts.
A voluntary liquidation would stop demands from company creditors and allow the company to write off 100% of its debts. It would also enable the directors to close the company as soon as possible.
Is my company insolvent?
There are three insolvency tests to establish if your company is insolvent.
Cash flow test
Can the company pay its debts as and when they fall due?
If you are finding that the company is suffering from poor cash flow and as a result, it is unable to meet payment terms of its creditors or maybe it is not paying national insurance and income tax contributions for directors or staff, then your company is more than likely insolvent.
Balance sheet test
Does the company owe more than it owns, or in other terms are the company’s assets exceeded by its liabilities? If the answer is yes, then the company is more than likely insolvent.
Legal action test
If a creditor has taken legal action and has obtained a county court judgment (CCJ) or a statutory demand against the company, this may indicate the company’s insolvency and allow the creditor to petition to wind it up.
Therefore if your company has one or more CCJs and/or a statutory demand, it is more than likely insolvent.
If you believe that your company has failed any of the above tests, it is crucial that you take immediate action to address the company’s insolvent situation.
Directors of a company have a legal obligation to seek appropriate advice and take action if they believe the company has an insufficient cash flow to pay its debts as and when they fall due. If they do not, then directors could find themselves personally liable for the debts that they have accrued since they should have taken those steps. The ‘Company Director Disqualification Act 1986’ deals harshly with directors who ignore the early warning signals and continue to trade.
When is voluntary liquidation appropriate?
With a voluntary liquidation, the company will cease to trade, its assets are realised (sold) and employees dismissed.
Where it may be possible to trade out of the situation, or continue in business, other insolvency procedures such as a company voluntary arrangement (CVA) need to be considered. It is for this reason that directors should contact Focus Insolvency Group who can guide you through your options.
Voluntary liquidation may be appropriate where:
- The company is insolvent.
- A CVA is not appropriate.
- The company does not appear to be viable even if restructured.
- The directors do not feel they have the finances or determination needed to rescue the company.
In some circumstances, it may be possible for the directors to form a new company and have this company buy back some or all of the assets of the old one, so as to ensure the business survives and continues trading from a position of strength having been restructured. Focus Insolvency assess every situation and provide directors with the best options available to them.
Advantages of Voluntary Liquidation
Voluntary liquidation can have a number of major advantages for directors and shareholders of a company that has overwhelming debt problems
The main advantages of voluntary liquidation are:
- Make a fresh start, free from crippling debt.
- Write off 100% of what the company owes.
- Minimise director’s exposure to wrongful trading action.
- Provide peace of mind to the directors.
- Stop demands from creditors.
- You no longer have to deal with creditor’s letters and phone calls
When you enter into voluntary liquidation with Focus Insolvency we will become the point of contact for your creditors, this means that you do not have to take anymore harassing phone calls and any threatening letters can simply be sent to our office for us to deal with.
It is the Liquidators duty to deal with all creditors and realise the assets. The directors are removed from office and free to make a fresh start.
We will help you explore your options. We will discuss the company’s financial position with you, review the company’s viability, financial forecasts and background and explain the various insolvency procedures, such as a voluntary liquidation, CVA or even Administration and discuss which would be appropriate for your company.
One of our Insolvency Practitioners will act as the advising member and proposed liquidator.
At this stage, all creditors and shareholders are written to and informed of your wishes to put the company into voluntary liquidation. We then become your creditor’s point of contact and any threatening calls or letters can be referred to us.
The Insolvency Practitioner writes to the creditors and shareholders informing them of a creditors meeting. The Director(s) act as chairman and the Insolvency Practitioner conducts the meeting. At Focus Insolvency we specialise in Virtual meetings, so unless 10% of creditors, 10 creditors, or 10% in value wish for a physical meeting the meetings are held via a conference call. In most cases, no creditors attend the meeting but if they do, questions may be asked over the cause of failure of the company. The meeting of creditors is usually a straightforward and short meeting that is on most occasions conducted via a conference call.
A statement of affairs that has been prepared by the Insolvency Practitioner with the help of the directors, is given to the creditors at the meeting. The creditors officially agree on the appointment of the liquidator at this time.
The liquidation commences properly at this point. The assets of the company are sold, the outcome of this sale is reported to the creditors and if any value is left after the liquidation process, payment is made for settlement of the creditor’s claims.
Our consultation and advice are completely free of charge.