What is Creditors’ Voluntary Liquidation (CVL)?
Creditors’ Voluntary Liquidation (CVL) is a procedure used when the directors of a company acknowledge that the company is insolvent and cannot continue its operations, prompting them to voluntarily wind up the company’s affairs. Unlike compulsory liquidation, a CVL is initiated by the company’s directors rather than by a court order. During this process, an insolvency practitioner is appointed to liquidate the company’s assets and distribute the proceeds to creditors.
Key Elements
- Initiation by Directors: The process begins with a directors’ meeting where a resolution is passed to wind up the company.
- Creditors’ Meeting: Creditors are notified and a meeting is held for them to agree on the appointment of a liquidator.
- Asset Realization: The liquidator takes control of the company and sells its assets.
- Debt Settlement: Proceeds from the sale of assets are distributed to the creditors in a specific order of priority.
- Company Dissolution: Upon completion of asset liquidation, the company is formally dissolved and removed from the company register.
Examples
Example 1: Small Retail Business
A small retail business experiencing declining sales and mounting debts may choose CVL to cease operations, sell remaining stock, and repay creditors.
Example 2: Construction Firm
A construction firm unable to complete its projects due to severe financial constraints may opt for CVL to settle debts from suppliers and subcontractors.
Frequently Asked Questions (FAQs)
What is the main difference between CVL and compulsory liquidation?
Answer: CVL is initiated voluntarily by company directors, while compulsory liquidation is initiated via a court order, often by a creditor petitioning the court due to unpaid debts.
Who oversees the CVL process?
Answer: An appointed insolvency practitioner oversees the CVL process, taking charge of liquidating assets and distributing funds to creditors.
Do directors face any legal implications when initiating a CVL?
Answer: Directors may be investigated for wrongful trading or misfeasance. However, initiating CVL is often viewed favorably if it’s a step to responsibly manage company insolvency.
How are creditors involved in the CVL process?
Answer: Creditors are invited to a meeting where they can vote on the appointment of the liquidator and may form a liquidation committee to oversee the process.
Can employees claim redundancy in a CVL?
Answer: Yes, employees may claim redundancy and other owed amounts from the National Insurance Fund if the company cannot pay their entitlements.
What happens to the company’s contracts during CVL?
Answer: Contracts typically come to an end once liquidation begins, though specific terms may vary based on contract clauses and legal advice.
Can a company be saved after initiating a CVL?
Answer: Once the CVL process begins, the company’s operations cease, and it heads towards dissolution, so rescuing the business post-CVL initiation is highly unlikely.
How long does the CVL process take?
Answer: The length of the process varies, typically between 6 months to 2 years, depending on the complexity of the case and asset realization.
Are shareholders paid in a CVL?
Answer: Shareholders are the last in line for payment and only receive funds if any remain after all creditors are paid in full, which is rare in insolvency cases.
Is CVL public information?
Answer: Yes, a CVL is a matter of public record and the process is documented with the official company register.
Related Terms
Insolvency Practitioner
A licensed professional authorized to act on behalf of insolvent companies and individuals, overseeing the liquidation process.
Liquidation
The process of winding up a company by converting assets into cash to pay off creditors and distributing any surplus to shareholders.
Compulsory Liquidation
A court-ordered procedure where a company is mandated to liquidate its assets and dissolve, often initiated by a creditor’s petition.
Administration
An alternative to liquidation where an insolvency practitioner attempts to restructure or sell a company to pay off debts without dissolving it.
Online References
- Insolvency Service: Company Liquidation
- Institute of Chartered Accountants in England and Wales (ICAEW): Liquidation
- Association of Business Recovery Professionals (R3)
Suggested Books for Further Studies
- “Corporate Insolvency Law: Perspectives and Principles” by Vanessa Finch and David Milman
- “Principles of Corporate Insolvency Law” by Roy Goode
- “Mayson, French & Ryan on Company Law” by Derek French
- “Insolvency: Law and Policy” by Andrew Keay
Accounting Basics: “Creditors’ Voluntary Liquidation (CVL)” Fundamentals Quiz
Thank you for delving into the intricacies of Creditors’ Voluntary Liquidation (CVL)! Exploring the real-world applications of accounting principles not only increases your financial acumen but prepares you for diverse scenarios in corporate management and insolvency practices.
