Are you aware of a company that is beyond rescue? Maybe you’re a director of an insolvent company where there is no successful turnaround available, and you’re currently looking at the next steps.
If you know of or are faced with this situation, then you may be looking at a creditor voluntary liquidation.
A creditor’s voluntary liquidation is a formal insolvency procedure that officially ends an insolvent company.
This process must be carried out by a licensed insolvency practitioner responsible for managing and facilitating the entire liquidation process.
Creditors’ voluntary liquidation is certainly not something that a business and its directors enter into lightly, and there will be numerous factors and reasons behind the decision, which we will explore in more detail throughout this post.
To find out more about Direct Route and how our team can help your business’s credit control function, visit our page today.
What is creditors’ voluntary liquidation?
To define creditors, voluntary liquidation is when the directors of a company have decided to close the company voluntarily.
This decision comes after constant reviews and conversations with all directors about the company’s future. In particular, the decision will come from the understanding that the business has been in financial distress for a long time, and there is no possibility at this stage of a successful turnaround.
(It may be advisable to speak with a professional debt collection team to review outstanding invoices and collection options to see if outstanding debts can be successfully collected and support the business’s cash flow. Professional debt collection teams can also support your in-house credit control teams with processes and procedures, which can help to maintain more positive cash flow).
Make sure to check out our latest post on “Everything you need to know about credit applications,” which can be a great way to vet customers and check their financial standing and ability to repay you as the creditor.
If all options for a successful turnaround have been exhausted, then it is at this point that directors have a legal responsibility to protect outstanding creditors, and in these circumstances, it is the best solution for all parties to enter into voluntary liquidation.
Voluntary liquidation
Testing and understanding whether a company is insolvent is discovered through the:
Cash flow test – a company is cash flow insolvent when it can’t meet its debt obligations when they fall due.
Balance sheet test – a company is balance sheet insolvent when the company debts are greater than the value of the assets.
A company’s voluntary liquidation is what will bring a company to a close and deal with any outstanding company debts.
As part of the voluntary liquidation, the assigned insolvency practitioner will evaluate and look at the company’s assets, which will often be sold as part of the liquidation process, to avoid the directors being personally liable for the liquidation fees.
However, entering into a CVL can mean a shortfall to creditors, and when creditors experience customers not paying, this could be one of the reasons.
It will be the responsibility of the insolvency practitioner to liaise with creditors.
Commercial debt recovery process
- Directors decide on creditors’ voluntary liquidation
- An insolvency practitioner will be brought in to oversee and manage the entire liquidation process
- Notify shareholders and creditors by presenting them with a statement of affairs outlining the financial position of the company
- Voluntary liquidation of the company commences
- Insolvency practitioners work with the creditors with assets distributed throughout the process. Creditors will often be paid in the following order: banks and asset-based lenders who have a fixed charge over the business will be paid first. Professional creditors, i.e., employees; secured creditors with a floating charge, i.e., stock or raw materials; unsecured creditors, such as trade creditors; and the final group that an insolvency practitioner will look at its shareholders.
Note: Company debts will be written off.
- After liquidation, the company will no longer exist, and the company name will be removed from the register at Companies House.
Dos and Don’ts of creditors’ voluntary liquidation
- A company will not be able to get any further credit when insolvent.
- A business will not be able to engage in activity that worsens the creditors’ position and increases their losses further.
- You won’t be able to pay one creditor over another, as this can be seen as a preference payment.
Do:
- Seek advice and support from a licensed insolvency practitioner who will handle the liquidation process from start to finish.
- Speak to a professional and experienced debt collection team who can help you with a customer not paying and support you with robust credit control processes.
Debt collection services
At Direct Route, our collection specialists support businesses with their credit control processes, collecting outstanding invoices, ensuring payments are made on time, and introducing robust credit procedures that support credit control teams.
To find out more, email memberbenefits@directroute.co.uk.