Creditors Voluntary Liquidation (CVL)

In a nutshell, a Creditors Voluntary Liquidation (CVL) is typically invoked by the Directors of a company due to the company becoming insolvent.

A CVL is a formal procedure used to close down an insolvent company and in the main is the most common type of liquidation. A company is deemed insolvent if any of the below apply:

The Balance Sheet Test:

If the value of the company's assets are less than its liabilities then in essence the company is insolvent. Basically this means that the company closed down immediately, it cannot afford to pay all its Creditors.

The Cash Flow Test:

This is a little more subjective but if the company cannot pay its debts as and when they fall due or called upon then the company is deemed as insolvent.

Some other warning signs to look out for include creditors threatening to take legal action, Debt Collection Agencies making demands for payment, legal action being taken or Bailiffs having been instructed or finally if a Statutory Demand or Winding Up Petition has been issued.

Once either of the above tests have been established then it is important to act as soon as possible to avoid any potential issues arising for claims of wrongful or fraudulent trading.

If a CVL is deemed to be the most appropriate option then the company will normally stop trading immediately to ensure that a creditors position is not made any worse. This in turn protects the interests of the directors against any claims of wrongful trading.

In certain situations, it may be possible to conduct what is known as a Pre-Pack Administration. This is a legal way of the failing company to sell the business on to a third party, new company or to the existing directors. More about this in the Pre-Pack Administration section.

It is crucially important as a Director, that if you believe your company may be insolvent, then you seek professional support as soon as possible. Do not delay this as it may have serious implications against the Directors.

For help on this and other matters please feel free to contact us.