When a limited company in the UK is no longer able to pay its debts as they fall due, one of the formal insolvency options available is a creditors voluntary liquidation (CVL). This process allows directors of insolvent companies to voluntarily wind up the business in an orderly manner, rather than waiting for a creditor to force the issue through court proceedings.
This article explains how CVL works, when it may be appropriate, and how it relates to investigations into misuse of government financial support, particularly in relation to bounce back loan fraud.
What Is Creditors Voluntary Liquidation?
A creditors voluntary liquidation is a formal insolvency procedure where the directors of a company voluntarily decide to close the company because it is insolvent. Insolvency can mean that the company is unable to pay its debts on time or that its liabilities exceed its assets.
The process generally involves the following steps:
- Resolution by directors: The board of directors agrees that the company should be liquidated.
- Shareholders’ meeting: A shareholders’ vote is required to formally resolve to wind up the company.
- Appointment of a liquidator: A licensed insolvency practitioner is appointed to take over the company’s affairs.
- Meeting of creditors: Creditors are informed of the liquidation and can vote to confirm or replace the liquidator.
- Asset realisation: The liquidator identifies and sells company assets to repay creditors in order of priority.
Once liquidation is complete, the company is removed from the Companies House register and ceases to exist.
Why Would a Company Enter CVL?
Companies typically enter CVL when there is no realistic prospect of returning to solvency. Directors may opt for CVL instead of allowing creditors to initiate compulsory liquidation because:
- It shows proactive governance by directors.
- It allows for better organisation of asset disposal.
- It can reduce disruption to creditors, employees, and other stakeholders.
Although CVL is initiated by directors, it primarily serves the interest of creditors. The liquidator’s duty is to gather all available assets and distribute them fairly among creditors according to statutory rules.
Director’s Duties and Investigations
One of the standard responsibilities of the liquidator is to examine the conduct of the directors in the time leading up to the company’s insolvency. This includes reviewing financial transactions, asset sales, and any unusual or potentially improper behaviour.
The liquidator reports to the Insolvency Service, and if misconduct is identified, directors may face disqualification from acting as directors in the future, or even legal consequences.
Bounce Back Loans and Insolvency Scrutiny
Since the COVID-19 pandemic, many companies applied for financial relief under the government-backed Bounce Back Loan Scheme (BBLS). These loans were offered with minimal checks and often disbursed quickly, making them susceptible to misuse.
During a CVL, the use of bounce back loan funds is now a key area of scrutiny. Liquidators will investigate whether the loan was:
- Spent on legitimate business expenses.
- Transferred to directors or third parties improperly.
- Used when the company was already insolvent or had no realistic prospect of survival.
If any of these issues arise, directors may be reported for potential bounce back loan fraud. Fraudulent use of BBLS funds may lead to civil recovery actions, criminal prosecution, or director disqualification, depending on the severity and intent of the misuse.
Conclusion
Understanding creditors voluntary liquidation is important for company directors, creditors, and stakeholders alike. It provides a structured and legal method to wind down an insolvent business. However, it also involves serious responsibilities, especially regarding the treatment of creditors and public funds.
If your company received government loans, it’s essential to understand how their use will be evaluated during the insolvency process. Directors who misused these funds—whether intentionally or through lack of understanding—may face significant legal consequences related to bounce back loan fraud.
Staying informed about your obligations before, during, and after liquidation is key to ensuring compliance with UK insolvency laws and protecting your position as a company director.
