The humble Creditors Voluntary Liquidation (or “CVL”) is the most common corporate insolvency process in Australia, with far more CVLs being undertaken than any other type of appointment. Let’s take a look at why they are the best fit for such a wide range of businesses that find themselves in financial difficulty.
What is Creditors' Voluntary Liquidation?
CVL is a process where a company’s directors and shareholders voluntarily wind up the company because it is unable to pay its debts (i.e. the company is insolvent).
Why opt for CVL?
A CVL is often the best process for companies facing significant financial challenges with no realistic prospects of turning the business around or continuing to trade. This might occur if the company’s business has reached its natural conclusion or the directors and shareholders no longer wish to pursue the business.
Other voluntary solvency processes available, such as Small Business Restructuring and Voluntary Administration, are targeted at companies seeking to turn their business around and continue trading.
Key benefits of CVL
CVL brings an orderly end to a company that can no longer pay its debts, providing a clear conclusion to its financial obligations.
Undertaking a CVL can offer some protection to directors. Insolvent trading stops when a liquidator is appointed, and commencing a CVL can mitigate the risk of directors receiving a non-lockdown Director Penalty Notice (though it does not protect against a lockdown Director Penalty Notice).
The CVL process is relatively cost-effective compared to other voluntary solvency options due to its focus on winding up the company in an orderly manner.
Understanding the implications of CVL
While CVL can provide resolution for a company unable to pay its debts, it does have implications for the company’s directors.
Risk of claims
Once appointed, a liquidator has access to a number of claims and clawback provisions under the Corporations Act, including potential claims against the company’s directors. Before commencing a CVL, directors should seek advice on any potential claims that may arise.
Credit rating
Commencing a CVL as a director of a company can negatively impact the director’s personal credit rating, potentially affecting their ability to borrow in the future.
Licensing
A range of state and federal licensing regimes may be impacted by the commencement of a CVL by a director. This could include the cancellation of the director’s personal licenses. Directors holding licenses should seek advice on how a CVL might affect them before proceeding.
As a result, while CVL can be a straightforward and effective solution for insolvent companies, directors should consider its potential consequences carefully and seek appropriate advice before making a decision.
Conclusion
Creditors Voluntary Liquidation (CVL) provides a structured and efficient approach for companies facing insolvency to conclude their operations responsibly. By allowing directors and shareholders to voluntarily wind up a company, a CVL ensures an orderly resolution to financial challenges while offering certain protections against ongoing liabilities.
However, it is essential for directors to carefully weigh the potential risks, including impacts on personal credit ratings and licensing, and seek professional advice before embarking on this path. Ultimately, CVL represents not only an end but also an opportunity to close one chapter and look forward to new ventures with clarity and resolve.