What Is A CVL?

There are a variety of situations that directors can find themselves in, where it’ll be pertinent to table the question of whether their company should continue trading or not. There are both legal and practical tests that can be taken to see if this is necessary.

If the company is found to be insolvent, it may be necessary to wind up the company. One route to this is to propose a Creditors Voluntary Liquidation, or CVL. Here, we go into what that means, and when it might be beneficial.

A Creditors Voluntary Liquidation is a way of liquidating a company's assets in order to pay creditors. It represents an attempt by directors to limit potential losses suffered by creditors, which directors have a legal duty to prevent. 

It is typically initiated by directors of insolvent companies, who will put it to a vote with shareholders. At least 75% of shareholders must vote in favour of the process; if this happens, then an insolvency practitioner will be identified and appointed as the liquidator.

Companies House must be informed, who will then place a notice in the Gazette. The creditors will also be informed of the petition; in order for the process to begin, a majority of creditors must also vote in favour of the CVL.

A Creditors Voluntary Liquidation is often an appropriate course of action for companies that are insolvent, and if there’s no chance of turning the company’s finances around. It can be beneficial for directors in particular, as it allows them to take more control of the process. Directors can choose their own liquidator, and it’s preferable in other ways as well compared to a Compulsory Liquidation.

There are legal and practical tests to see if a company should cease trading and carry out a process such as a CVL:

To carry out this test, you simply add up the value of all of the company’s assets and compare it to the value of the company’s liabilities. If the liabilities are worth more than the assets, then the company has failed the balance sheet test.

Directors must assess whether the business can pay its debts when they become due in order to perform the liquidity test. The director should look for counsel and direction if they are unable to meet those liabilities when they fall due.

There are also certain events that practically imply that a company is no longer solvent. Such events might consist of:

Any or all of these occurences represent pressure from creditors to pay debts. If these liabilities cannot be paid, then the company is likely insolvent.

If your company is experiencing serious insolvency issues, reach out to an insolvency practitioner. They’ll be able to advise on which route to take, helping to minimise further damage.