A Creditors’ Voluntary Liquidation is a formal insolvency procedure used to close an insolvent limited company.

It is normally initiated by the company’s directors and shareholders rather than by a creditor applying to court. The shareholders resolve to wind the company up and an authorised insolvency practitioner is appointed as liquidator.

The liquidator then takes control of the company’s affairs, deals with its assets and creditors, carries out the required statutory work and ultimately brings the company to an end.

A CVL should be distinguished from a Members’ Voluntary Liquidation (MVL), which is intended for a solvent company that can pay its liabilities in full.

A CVL may be appropriate where the company is insolvent and there is no realistic rescue or restructuring option available.

• The company cannot pay HMRC, suppliers or other creditors when payments fall due
• Tax arrears or other liabilities are continuing to increase
• Creditors are threatening court or enforcement action
• The business is continuing to make losses
• There is insufficient working capital to continue trading safely
• Attempts to refinance or restructure the business have been unsuccessful
• The directors believe that continued trading could make the position worse

Insolvency does not automatically mean liquidation is the only option. The first step should be to establish the company’s actual financial position and consider whether there is a viable alternative.

The Scottish CVL process has its own procedural requirements. We will guide the directors through each stage and prepare the necessary documentation.

1. Initial review and advice – we discuss the company’s financial position, assets, liabilities, employees and creditor pressure and consider whether liquidation is the appropriate option.
2. Preparing for liquidation – financial information is gathered and the necessary shareholder and creditor documentation is prepared.
3. Shareholders resolve to wind up the company – the company’s members pass the required winding-up resolution.
4. Scottish creditor procedure – creditors are notified and the creditors’ decision on the nomination of a liquidator is sought by deemed consent or a decision procedure conducted virtually. The directors prepare a statement of affairs for creditors.
5. Liquidator appointed – an authorised insolvency practitioner takes office as liquidator and assumes control of the company’s affairs.
6. The liquidation is administered – the liquidator deals with company assets, creditors, employees, statutory reporting and any matters requiring investigation before the company is ultimately dissolved.

Once appointed, the liquidator is responsible for winding up the company’s affairs in the interests of its creditors.

• Taking control of the company’s books, records and assets
• Realising assets where appropriate
• Establishing creditor claims
• Dealing with employees and statutory claims
• Reviewing the company’s financial affairs and relevant transactions
• Reporting on matters required by insolvency legislation
• Distributing available funds to creditors in accordance with the statutory order of priority
• Completing the liquidation and progressing the company towards dissolution

Once the liquidator has been appointed, the directors no longer control the company’s business and assets, although they remain required to provide information and co-operate with the liquidator.

Creditors submit their claims in the liquidation and the liquidator deals with those claims as part of winding up the company.

Where there are assets available, funds are distributed in accordance with the statutory order of priority. In many insolvent liquidations there will not be enough money to repay all creditors in full.

The fact that the company cannot repay all of its debts does not automatically make its directors personally liable for the shortfall. A limited company is a separate legal entity.

There are, however, important exceptions. A director may have personal exposure where, for example, they have given a personal guarantee, owe money to the company or particular issues arise from their conduct or transactions.

Where the business ceases trading, employees will normally be made redundant.

Eligible employees of an insolvent company may be able to claim certain amounts they are owed through the government’s Redundancy Payments Service, subject to the statutory eligibility requirements and limits.

• Statutory redundancy pay
• Certain arrears of wages
• Accrued holiday pay
• Statutory notice pay

The insolvency practitioner dealing with the liquidation provides employees with the information needed to make the relevant claims.

For many directors, concerns about their own position are just as important as questions about the company itself.

Placing a company into liquidation does not of itself prevent you from being a director of another company. However, the liquidator is required to consider the company’s affairs and director conduct, and there are specific issues that may require attention.

Overdrawn director’s loan accounts
If you owe money to the company through a director’s loan account, that balance is generally an asset of the company and the liquidator will consider how it should be recovered.

Personal guarantees
A company entering liquidation can result in lenders, landlords or other creditors seeking payment from a director under a valid personal guarantee.

Bounce Back Loans
A Bounce Back Loan is normally a liability of the company rather than the director personally, but the liquidator may review how borrowing was obtained and how company funds were used.

Director conduct
The liquidator reviews relevant aspects of the company’s affairs and reports on director conduct as required by law. The fact that a company has failed does not by itself mean that a director has done anything wrong.