What is a Creditors’ Voluntary Liquidation?
As the name suggests, a CVL is a voluntary process which is initiated by the directors of the company. Despite being voluntary, it is often the only option left available to a company which has exhausted all attempts to get itself back on a solid financial footing.
As part of the CVL process, a licensed insolvency practitioner will be appointed to liquidate the company and ensure it is closed in an orderly manner in accordance with the Insolvency Act 1986. It will be the insolvency practitioner’s role to identify and sell assets of the company, liaise with outstanding creditors, distribute any available funds to creditors on a proportional basis, investigate the conduct of directors, before ensuring it is removed from the Companies House register of active companies.
What happens to debts during voluntary liquidation?
With a CVL, all debts of the company which cannot be repaid following the sale of company assets, will be written off. This is because a limited company is classed as its own legal entity, and not as an extension of its directors or shareholders. When a company is liquidated, it ceases to exist, and therefore any debts which remain outstanding are no longer recoverable; in essence, the debts die with the company.
The exception to this is if the director has personally guaranteed any of the company’s borrowing. If this has been done then at the point of liquidation the personal guarantee will crystalise, and the responsibility for paying the remaining amount of the borrowing will fall to the director who will be expected to use personal funds to service the debt. Directors can also be held personally responsible for company debts if any instances of wrongful or fraudulent trading is uncovered during the conduct investigation.
However, as long as no misconduct has taken place and no personal guarantees have been given, outstanding company debt – including that owed to HMRC – will be written off as part of the liquidation process.
Don’t Fall Foul of Unqualified AdviceDirectors responsibilities when insolvent
Liquidation helps to protect creditors from any further financial losses, as well as ensuring directors are adhering to their legal obligations as the director of an insolvent company. This is because once a company is knowingly insolvent, its directors have a responsibility to prioritise creditor interests and place these ahead of the interests of the company; contacting an insolvency practitioner and taking steps to solve the issues you are facing demonstrates your desire to adhere to your duties as director.
Company liquidation advice
Placing your company into voluntary liquidation is a big step to take, however, in many cases it is the best course of action for all involved where there is no prospect of the company being viable long-term.
If you are worried about the ongoing viability of your limited company, or if the company has outstanding debts you know you will be unable to repay, you should make it a priority to contact an insolvency practitioner as a matter of urgency who will be able to help you understand your options.
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