5 Reasons You Should Never Put Off The CVL Process

While the decision to place a solvent company into liquidation via Members Voluntary Liquidation should not be delayed for practical and financial reasons (as we covered in the first article in this series), the implications of postponing an insolvent liquidation, specifically a Creditors Voluntary Liquidation (CVL), can be far more damaging.

Companies in this situation who can no longer pay their debts as they fall due have a legal responsibility to act in the best interest of their creditors. Delaying the CVL process can result in serious personal and legal consequences for you as a company director, alongside a host of avoidable complications for the company itself. 

With this in mind, let’s explore the key reasons why putting off the CVL process is a risk no company director should take.

Why Companies Should Not Delay An Insolvent Liquidation

A Creditors Voluntary Liquidation is intended for companies that can no longer pay their debts as they fall due. It gives directors the option to take control of the situation by initiating a structured winding-up process and securing a better outcome for creditors, employees, and themselves. 

1. Risk of Wrongful Trading

One of the most significant dangers of delaying the CVL process and continuing to trade while insolvent is the risk of wrongful trading. If you continue to operate the business knowing that it is no longer viable and fail to take steps to mitigate losses to creditors, you can be held personally liable for any additional debts incurred during that time. This can lead to severe financial penalties and even disqualification from acting as a company director in the future.

By promptly and voluntarily beginning the liquidation process when faced with insolvency, you can instead demonstrate that you have taken appropriate action at the right time. 

2. Escalating Debts and Creditor Pressure

 The longer an insolvent company continues to operate, the more likely it is to accumulate further debt. For example, your suppliers may continue to extend credit terms, wage costs might go unpaid, and interest or penalties can begin to build up. This not only worsens the financial position of your company, but also increases the likelihood of creditors taking independent action and therefore the likelihood of HMRC enforcing compulsory liquidation via a winding-up petition. Avoiding a scenario in which you are forced into compulsory liquidation is always preferable.

However, once the CVL process begins, all creditor action is effectively frozen. As a director, you will gain breathing space and a licensed insolvency practitioner will take control to manage the company closure in the correct way. This professional will handle asset sales and fund distribution to creditors, without the looming thought of enforcement action and the worry of subsequent compulsory liquidation. 

3. Damage to Personal and Business Reputation

When a company enters insolvency in a chaotic way, often as a result of delaying the CVL process, there is a far greater risk of stakeholders being blindsided by the situation. This can lead to confusion, mistrust, and serious reputational damage, both for you as a director and the business as a whole. Given that, in many circumstances, directors are allowed to act in this position again following company liquidation, limiting any damage that may be done to your reputation should be of utmost priority.

Promptly entering into the CVL process when faced with insolvency can help with this. A CVL allows you to demonstrate that you are taking proactive and transparent steps to communicate with all affected parties and want to get the best outcome for them where possible. This can be critical in demonstrating responsible leadership and reducing the likelihood of long-term fallout and reputational damage.

4. Missed Opportunities for Asset Protection

Once a company becomes insolvent, any remaining assets must be preserved for the benefit of creditors and distributed in a particular order. If you delay the CVL process, you run the risk of asset values deteriorating, stock becoming obsolete, and even intellectual property losing relevance. It may also be deemed that you are mismanaging or even misappropriating company resources.

Ensuring the CVL process begins promptly allows for a licensed insolvency practitioner to take control and ensure that assets are sold or transferred in a manner that maximises the returns for creditors. This not only reduces the risk of scrutiny but also of further losses.

5. Increased Stress and Reduced Control

There is no denying that trying to keep a failing business going is incredibly stressful. If you are in this position, you will find yourself balancing creditor demands, growing staff concerns, and gloomy financial records. Putting off your next steps prolongs this uncertainty and only reduces the chances of achieving a favourable resolution for all involved.

Initiating a CVL can be daunting, but often the act of starting this process will reduce stress almost immediately. The CVL process puts experienced insolvency professionals in charge of managing the next steps, bringing clarity, structure and closure so that you can move on. It is not a decision that signals failure, but one that shows sensible leadership and a willingness to move forward in the right way.

If you suspect that your company is no longer able to meet its financial obligations, the most responsible thing you can do is seek professional advice and initiate the CVL process. This recognised route brings your struggling company to a close in the fairest way possible and allows you to avoid the serious legal and financial implications of inaction.

To get expert insolvency advice regarding Creditors Voluntary Liquidation, do not hesitate to reach out to our licensed insolvency practitioners today. At My Liquidation, we can answer all of the questions you may have and guide you through the process effectively.