When a company has built up enough debt that it becomes challenging to pay off all the debts. The director of a company is left with no option except the liquidation of all the assets of a company or the Creditors Voluntary Liquidation. However, the liquidation process itself is challenging in many ways.
If you are struggling to pay off your debts and your creditors are putting pressure on the early payment of all the repayments, you have to consider liquidating or selling all your assets of a firm. So, let’s start with the introduction of creditor’s voluntary Liquidation.
Besides, we will discuss the process leading toward the creditor’s voluntary liquidation and the costs associated with this. Moreover, the need for selling off all the assets will be a part of this important discussion. So, let’s delve deep into this discussion!
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What is Creditors’ Voluntary Liquidation (CVL)?
Creditors’ voluntary liquidation becomes essential when a company fails to pay off all its debts for a long time. As a result, the creditors are forcing a company to liquidate or sell its assets to get the money for paying off its debt after the consent of the shareholders.
When there’s no other way round to manage all the debts and loans, liquidation is the last option. If a company does not plan to liquidate its assets, the creditors will send a notice to the company via a court. However, voluntary liquidation is an ideal option as it provides many benefits in the form of time to sell a company.
If a company cannot get enough money from selling all the assets, then the director is required to pay all the debts. As the debt is provided by estimating the cost of the assets by the creditors, if assets are not completely paid back, then the director is responsible for paying back the debts.
Why the Need For a CVL Does Arise?
The need for a creditor’s voluntary liquidation arises due to many factors. Following are the reasons for the liquidation of an organisation:
- Scarcity of cash
- Petition filed by the creditors
- A company becomes insolvent
- A company is unable to meet the demand of the dynamic and evolving market trends.
- The company has built a bad debt.
- The company is unable to meet its expenditures.
What is the Process of a Creditors Voluntary Liquidation?
An insolvent company can begin the liquidation process and finishes it after four stages of back-to-back meetings with different stakeholders of a company. First of all, the director is required to get the advisory services of a licensed insolvency practitioner and then take consent in different meetings.
Stage 1: Meeting of Board of the Directors
The director or the sole director makes a decision of liquidating the assets of the company after consultation with an insolvency practitioner. As a result, they decide on the arrangement of a meeting with the shareholders in the next phase.
Stage 2: Inform the Shareholders and the Creditors
In the second stage, the company informs and gives notice to all the shareholders and the creditors that the board of directors have resolved to sell the assets and wind up the company.
Moreover, the documentation on the company’s assets and liabilities, accounts, financial position, trading history and record of the company’s movements between the last account and the liquidation date is prepared by the company and the insolvency practitioner. This report is presented to the creditors.
Stage 3: Commencement of the Liquidation
The commencement of the liquidation begins on the same day as the decision date of the liquidation. However, the meeting with the shareholder is not necessarily in physical form.
The meeting will be physical if it is required by the creditors after fulfilling the following criteria.
- 10 Creditors
- 10% Creditors in Value
- 10% Creditors in Numbers
However, this commencement of liquidation cannot take place without the consent of at least 75% of the shareholders.
Stage 4: Final Creditors Voluntary Liquidation
The final liquidation begins after the consent of all the shareholders and the creditors. The insolvency practitioner can initiate the process by preparing reports and sharing them with the creditors to ensure there’re no disagreements.
The practitioner is responsible for analysing the market value of the assets and the creditor’s claims. He is also liable to manage all the government agency’s requirements. Similarly, he prepares reports and fulfils the claims in the order of priority. First of all, the secured creditors with a fixed charge, then the preferential creditors and lastly the secured creditors floating charge are paid. After this, the unsecured creditors and HMRC are paid for the sale of the assets.
How Much Does the Liquidation Cost?
The cost of the liquidation is estimated to be around £5000 to £7000 for the small businesses in the UK. On the other hand, the whole process of liquidation takes a time of one or two years. The cost of the liquidation is deducted from the liquidation and the selling off of all assets.
Bottom Line
Finally, we can conclude an insolvent company can go for liquidation of the assets after consulting with a qualified insolvency practitioner. Bankruptcy and other similar reasons can lead to the decision of selling all the assets.
However, the director itself can buy back the assets or sell them to a third party to pay the creditors in a sequence of priorities. The whole process consists of the four stages in which meetings are held with the board of directors, insolvency practitioner, shareholders and the creditors. The final Creditors Voluntary Liquidation can span over a period of 12 to 24 months.
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Disclaimer: All the information provided in this article Creditors Voluntary Liquidation is general in nature. It does not intend to disregard any of the professional advice.