When a business finds itself in financial distress, creditors’ voluntary liquidation (CVL) often emerges as a viable option to wind down operations in an orderly manner. However, despite being a well-established process, many business owners and stakeholders harbour misconceptions about what CVL entails. These myths can lead to unnecessary fear, hesitation, or even costly mistakes. In this blog, we’ll debunk some of the most common misconceptions surrounding creditors’ voluntary liquidation, providing clarity and insight into the process.
Misconception 1: Creditors Voluntary Liquidation is the Same as Compulsory Liquidation
One of the most prevalent misconceptions is that CVL is the same as compulsory liquidation. While both processes involve winding up a company’s affairs, they are fundamentally different. In a CVL, the company’s directors take the initiative to liquidate the business when they recognise that it is insolvent and unable to pay its debts. This process is voluntary, and the directors collaborate with an insolvency practitioner to supervise the liquidation.
On the other hand, compulsory liquidation is initiated by creditors who petition the court to wind up the company. This process is often seen as more adversarial, involving legal proceedings and a court order. Understanding the difference is crucial for business owners as it can affect how they navigate their financial difficulties.
Misconception 2: Entering Creditors Voluntary Liquidation Means Directors Will Be Personally Liable
Many directors worry that if they place their company into CVL, they will automatically be held personally liable for the company’s debts. This is not necessarily the case. In a CVL, the company is treated as a separate legal entity, and its debts are not automatically transferred to the directors.
However, there are exceptions. Directors may be held personally liable if they are found to have engaged in wrongful trading or acted fraudulently. For example, if a director continued to trade knowing the company was insolvent or engaged in Bounce back loan fraud, they could be personally liable for the company’s debts. The key takeaway is that personal liability in a CVL is not automatic but is contingent upon the directors’ conduct leading up to the liquidation.
Misconception 3: Creditors Voluntary Liquidation Always Leads to the End of a Business
Another common misconception is that CVL always spells the end of a business. While CVL does involve winding up the company, it does not necessarily mean that the business itself will cease to exist in all forms. In some cases, the business’s assets may be sold to new owners who continue the operations under a different company structure. Alternatively, the directors may choose to start a new company, often referred to as a “phoenix company,” which can operate in the same industry and potentially with the same customer base.
It’s also worth noting that CVL can be a strategic move to restructure and start anew without the burden of the old company’s debts. By shedding the insolvent company, directors can often salvage key aspects of the business and move forward in a more financially stable position.
Misconception 4: CVL is Always a Negative Outcome
For many business owners, the idea of entering CVL is perceived as a failure or a negative outcome. However, this is not always the case. CVL can be a proactive and responsible way to address insolvency, allowing directors to manage the company’s closure in an orderly and professional manner. By choosing CVL, directors can minimise the impact on creditors, employees, and other stakeholders, which can preserve their reputation and relationships in the business community.
Additionally, CVL can offer a fresh start for directors who want to move on from an insolvent company. By resolving the company’s debts and closing it down properly, directors can focus on new opportunities without the shadow of unresolved financial issues hanging over them.
Conclusion
Creditors voluntary liquidation is a complex process that is often misunderstood. By debunking these common misconceptions, business owners and stakeholders can approach CVL with a clearer understanding and make informed decisions that best serve their interests. It’s crucial to seek professional advice when considering CVL, as each situation is unique, and the right approach can help mitigate risks and maximise outcomes.
