A contractor’s guide to CVL: Creditors' Voluntary Liquidation

If your contractor limited company has reached the end of its lifeline after exhausting all possible avenues of support, such as additional finance via the CIBL or BBL schemes, it may be time to familiarise yourself with another acronym during COVID-19, and that’s ‘CVL’;

Short for Creditors’ Voluntary Liquidation, a CVL is a must for those contractors who wish to shut shop before racking up further debt if -- and it is a big ‘if’ – if, there is absolutely no hope of recovery, writes Keith Tully of Real Business Rescue, business recovery specialists.

Covid, testing, symptoms

For some right now, and despite coronavirus lockdown lifting, not recovering is the reality. The sad truth is that the pandemic has been significant enough that the government is enforcing emergency measures to protect business empires across the country, as customer bases dry up and trade screeches to a halt, very often through no fault of the business-owners in question.

By placing a moratorium on the wrongful trading rules, company directors can purchase necessary stock to pursue a rescue, without the looming threat of personal liability. This grants you a fighting chance if you are one of those PSC owners feeling the brunt of the economic consequences of Covid-19.

However, if you suspect that your business has no hope of recovery, it may be prime time to test the financial health of your business. Fortunately, the cashflow and balance sheet tests for insolvency are uncomplicated.

Less positively, the symptoms of a business in decline due to covid-19 (or otherwise) go unnoticed too often. Microscopically analysing your balance sheet can help calculate if you have the financial lifeline to overcome this period of uncertainty, or if it will lead to your PSC’s final days.

CVL: where it comes in

If the latter looks inevitable, or even if you’re just prepping for the worst, know that a Creditors’ Voluntary Liquidation is a formal insolvency procedure to wind-up your company -- on a voluntary basis, because you see no hope of recovery and there’s little in the way of profits.

You’ll want a reputable, and licensed Insolvency Practitioner (IP) to facilitate your tax-efficient exit from your PSC, and oversee your CVL. In fact, as part of the CVL service, the IP will realise assets, distribute funds to your PSC’s creditors and then, the business will then be struck off the Companies House register. But CVL is not to be confused with MVL -- a Members’ Voluntary Liquidation, which is an exit route for solvent businesses approaching a natural end, such as retirement. It is also not to be confused with Compulsory Liquidation – ‘CL.’ And you thought there were enough acronyms at this unenviable end of a company’s lifeline!

Funding a Creditors’ Voluntary Liquidation

The talking point which typically goes amiss is the final financial hurdle of making payment to the IP. A fraction of struggling businesses are currently hanging by a thread, expecting to drop as soon as the plug is pulled on Covid-19 support schemes:

• The Coronavirus Business Interruption Loan (CBIL) scheme,
• The Bounce Back Loan (BBL) scheme,
• The Coronavirus Job Retention Scheme (CJRS)
• The Self-Employed Income Support Scheme (SEISS)

As this puts a temporary stopper on PSC shutdowns by a couple of months, many have absorbed irreparable damage and have no chance of recovery due to lost time, lack of seasonal sales and the tidal wave of change in purchasing behaviour due to the coronavirus.

The term ‘free liquidation’ or ‘low-cost liquidation’ often pops up when directors in financial distress go online, and these refer (not always totally clearly) to arrangements which use director redundancy pay to facilitate the cost of the liquidation process.

The onset of the coronavirus pandemic has led to many company directors terminating liquidation agreements during the preparation stage and redistributing any available funds to keep families afloat. Unprecedented trading conditions have left directors clutching their pockets, counting down until the economy breathes a sigh of relief and trading rules relax.

There’s two other keywords that confront ‘Googling’ directors, and each can confuse or be intentionally confused.

1. Director redundancy

This can unlock the funds needed to pass the final checkpoint before the financial affairs of the business are resolved, the company is liquidated and struck off Companies House. The average claim for Director Redundancy is £9,000, amounting to a fair portion of your fees to the insolvency practitioner and other financial commitments.

2. Assets

The money generated through the sale of assets should be used to repay creditors and the IP. The assets held by the business (such as machinery, property, excess stock and office equipment), will be valued and realised.

The beneficial aspect of letting your business out of limbo is acting in the best interest of creditors, protecting yourself from legal action and cutting off financial commitments relating to maintaining the business, such as rent, licenses, memberships, marketing and accounting fees.

CVL: Step-by- Step

Let’s now look closer at the process of a CVL. Here’s what should be done, and in the order of doing:

• Mutual decision - An agreement to put the business into liquidation is drawn up by the company’s directors, following an accumulation of months of financial distress, leading to insolvency.
• Notifying interested parties - Shareholders and creditors are informed of your decision to liquidate the business. As well as preparing all the documentation that is required for CVL process, your IP will summarise assets, liabilities and outstanding debts to creditors
• Setting liquidation in motion - If 70 per cent of shareholders agree to the liquidation, the process will begin. In terms of paperwork at this point, they pass a ‘winding-up resolution.’
• Liquidation in full swing – The process will be managed by your IP who will resolve creditor issues and realise assets to repay creditors. If you / the directors want to personally purchase company assets, this can be done so through the IP. However, this should be purchased at market value

The aftermath of the liquidation process will consist of an investigation into director misconduct, currently excluding ‘wrongful trading’ unless there are suspicions of criminal or fraudulent activity. This investigation will be routinely carried out in the event of a Creditors’ Voluntary Liquidation to ensure that the activity leading up to this point was not unlawful, such as trading assets at an undervalue and ‘preferential trading.’

An interview will take place with the director to investigate the above and financial records will be scrutinised, ensuring there are no undisclosed assets. Once the investigation has been satisfied with no red flags raised, the company will then be struck off the Companies House register.

Business-soloists, how can you tap-out efficiently during Covid-19?

If you need payment flexibility and require debt restructuring to survive, a Company Voluntary Arrangement (CVA) may be an appropriate route for you.

This path consists of negotiating longer payment terms with creditors, taking into consideration what you can realistically afford to repay.

As an emergency measure following the outbreak of Covid-19, the government has granted a three-month break to CVAs, which translates into a saving grace for many business soloists on the verge of tapping out due to poor cash flow.

Final thought

As the financial support put forward by the government starts to deplete, enter its final phase or get wound up altogether, the plaster is likely to be torn off the wound for many businesses on the brink -- but it’s the efficiency of the exit route which could help even out the balance sheet before shutting shop.