5 Advantages and Disadvantages of Creditors Voluntary Liquidation

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When your company can no longer pay its debts and has no viable path to recovery, Creditors’ Voluntary Liquidation (CVL) can be a responsible approach. CVL allows you to voluntarily close your business while ensuring assets are distributed fairly among your creditors transparently and professionally. If you are considering closing down your business, here are five advantages and disadvantages of creditors' voluntary liquidation to help you make an informed decision. 

Advantages

1. Protection from legal action

One of the most significant reasons for entering a CVL is its legal protection. Once the process begins, creditors can no longer initiate legal proceedings to recover debt. This includes court judgment, bailiff action, or a director's forced winding-up of the company. This means you can have peace of mind knowing that the risk of aggressive debt recovery is removed and replaced with a structured process overseen by a licensed insolvency practitioner.

2. Clears outstanding debts

Creditors’ Voluntary Liquidation effectively brings an end to the company's debt obligations. Once assets are sold and the funds distributed to creditors, any remaining unsecured debt is written off. This provides much-needed closure, especially if you have been dealing with financial stress. It also means that the company’s credit issues won’t follow the directors unless personal guarantees are involved. 

If you're unsure where to start, consider seeking help with creditors’ voluntary liquidation from licensed insolvency practitioners who can guide you professionally and ensure everything is handled correctly.

3. Prevents wrongful trading accusations 

Continuing to trade while knowing your business can’t pay its debts is considered wrongful trading. Choosing to enter into a CVL shows that you’ve acted responsibly and in the best interest of creditors. Here's how CVL prevents wrongful trading accusations:

• Acknowledging the problem early: Starting a CVL means the directors have recognized the company is no longer viable.
• Acting in creditors' interests: By voluntarily initiating liquidation, directors put creditors first, ensuring that remaining assets are fairly distributed instead of continuing operations that might increase losses.
• Working with a licensed professional: Once the CVL begins, a licensed insolvency practitioner takes over. Their involvement brings transparency and ensures that the process is handled according to the law, further protecting directors from blame.

Disadvantages 

1. Damage to credit and business reputation 

Once a company enters liquidation, it is marked on the public record, severely impacting its credit rating. Lenders, suppliers, and investors may be less willing to work with you in future ventures, especially if they suffer losses. Even if no wrongdoing occurred, reputational damage may follow the directors or the brand, depending on how public the closure becomes.

2. Business closure and job losses

CVL leads to the permanent closure of the business. This means employees are made redundant, operations end, and client or supplier relationships are lost. While your staff may be eligible to claim redundancy and unpaid wages through government schemes, the emotional and financial fallout can be significant for everyone involved.

 Endnote

Creditors' Voluntary Liquidation isn’t easy, but it can be the most responsible path when a company is no longer viable. However, it has lasting consequences, including business closure and credit damage. Familiarize yourself with the CVL pros and cons, and consult with a licensed insolvency practitioner to ensure you take the proper steps based on your situation.