In the first quarter of 2016 over 3,200 UK companies went into Creditors Voluntary Liquidation, according to the UK Insolvency Service. That’s more than 60% more of this type of business failure than in the first quarter of the previous year.
A Creditors Voluntary Liquidation is initiated by the board of directors of a company that is insolvent. It is the process of winding up the company. The assets are liquidated, converted into cash, and the money is used to settle outstanding bills.
The process is overseen by the creditors, who are owed money by the company. They are unlikely to be paid in full, but will at least get a proportion of their money back.
Why Companies Choose Creditors Voluntary Liquidation
There are a number of different options available to an insolvent business. Some are better suited to organizations that are fundamentally viable but are encumbered by too much debt. Where there is hope that the business can be saved it may be more appropriate to go into administration or enter a voluntary arrangement.
A Creditors Voluntary Liquidation is the solution for a company that has no reasonable expectation of recovering its trading position. It allows the company to be closed down in an orderly fashion, with due consideration to the interests of creditors.
Before choosing to go this route the directors will usually have taken advice from an insolvency practitioner, a specialist in dealing with companies unable to pay their debts.
The Process of Creditors Voluntary Liquidation
The directors call an extraordinary general meeting of the shareholders, at which they set out their reasons for choosing this route. If the shareholders agree, an insolvency practitioner is nominated to manage the process. This is usually the same practitioner that has been giving advice so far.
One of their first responsibilities is to call a meeting of creditors to explain what is going on. The creditors formally appoint the liquidator and may choose to create their own committee to monitor proceedings.
The liquidator’s job is to wind up the affairs of the company, disposing of all the assets for the best possible price and making payments to creditors. They also report on the conduct of the directors, to establish whether wrongful trading (knowingly trading when insolvent) has taken place.
A Creditors Voluntary Liquidation is the most common form of winding up an insolvent company in the UK. While the process is relatively simple it is a route that directors untake lightly and they will explore other, less drastic, options first.