If your company is struggling with debts it can’t pay, you might be wondering what options are available. One of the most common solutions for insolvent businesses is a Creditors’ Voluntary Liquidation (CVL). It’s a formal procedure that enables directors to close their company in a structured, compliant, and often less stressful way than being forced into liquidation by creditors.
In this guide, we’ll explain how a CVL works, why it might be the right option for your business, and what you need to know as a director going through financial difficulties.
What Is a Creditors’ Voluntary Liquidation?
A Creditors’ Voluntary Liquidation is a formal insolvency process used when a company is no longer able to pay its debts as they fall due. This could be due to cash flow problems, mounting liabilities, or sustained trading losses. Directors initiate the process themselves rather than waiting for a creditor to force their hand through a winding-up petition.
An appointed licensed insolvency practitioner (IP) takes over the company’s affairs, winding it down in accordance with UK insolvency law. This includes selling company assets, distributing funds to creditors, and eventually dissolving the business. Choosing a CVL can help protect directors from wrongful trading claims and ensure that all creditors are treated fairly and transparently.
Signs That Your Company May Need a CVL
Recognising the early warning signs of insolvency can help directors take action before the situation worsens. You may need to consider a CVL if:
- The company is unable to pay invoices, wages, or taxes on time
- You’re relying on short-term loans or director funding to stay afloat
- Legal actions such as County Court Judgements or statutory demands are becoming frequent
- You’ve reviewed the company’s balance sheet and found that liabilities exceed assets.
When these issues persist and no turnaround strategy seems viable, it’s often in the best interest of the company and its creditors to initiate a CVL promptly.
How the CVL Process Works
A Creditors’ Voluntary Liquidation follows a defined legal procedure, which ensures that all stakeholders are properly informed and that the company’s closure is handled responsibly. The steps typically include:
Board Decision
The process begins when the directors formally acknowledge that the company is insolvent and cannot continue trading. They agree to place the business into liquidation and prepare to involve a licensed insolvency practitioner.
Appointment of a Liquidator
The directors nominate a licensed insolvency practitioner (IP) to act as liquidator. The IP prepares the necessary paperwork and guides the directors through the legal steps required to place the company into liquidation.
Shareholders’ Resolution
A shareholders’ meeting is held to pass a special resolution to wind up the company. This requires approval from at least 75% of voting shareholders. Once passed, the resolution is filed with Companies House.
Creditors’ Meeting
Creditors are notified of the liquidation and invited to a virtual meeting. They review the company’s financial position and vote to confirm or replace the proposed liquidator. This ensures transparency and creditor involvement.
Asset Realisation and Distribution
The liquidator takes control of the company assets, sells them, and distributes the proceeds to creditors according to statutory order. Secured creditors are paid first, followed by preferential and unsecured creditors.
Final Dissolution
The company is officially dissolved after the liquidation is complete and all reporting obligations are met. It is removed from the Companies House register and ceases to exist as a legal entity.
This process typically takes several months to complete and ensures the business is closed in full compliance with UK regulations.
What Happens to Directors in a CVL?
For directors, a CVL can provide much-needed clarity and relief during a difficult time. It allows you to step away from an unviable business while fulfilling your legal duties.
The appointed liquidator will conduct a routine investigation into the company’s affairs and the directors’ conduct in the period leading up to insolvency. This is standard practice. As long as directors have acted responsibly and sought advice when problems became clear, there is usually no personal risk or penalty involved.
Taking early action to enter a CVL shows a willingness to deal with the situation properly, which can help protect your professional reputation and future opportunities.
What Happens to Employees?
All employees are made redundant when the CVL begins. However, they may be entitled to claim various statutory payments, including:
- Redundancy pay
- Unpaid wages and holiday pay
- Notice pay.
These payments are usually covered by the government’s Redundancy Payments Service (RPS), meaning employees don’t have to wait on the company’s limited funds. The insolvency practitioner will help manage this process and provide guidance to affected staff.
Is a CVL the Right Option for Your Business?
A CVL is best suited to companies with no realistic chance of recovery. If the business model is no longer sustainable or debts are unmanageable, continuing to trade can worsen the situation and increase the risk to directors.
Insolvency is more common than many business owners realise. One in 188 companies on the Companies House effective register (at a rate of 53.1 per 10,000 companies) entered insolvency between 1 April 2024 and 31 March 2025. This figure highlights how frequently UK companies face serious financial challenges that warrant closure.
In some cases, alternatives such as a Company Voluntary Arrangement (CVA) or business restructuring may be appropriate. These can help rescue a viable company if there’s potential for recovery. However, if closure is inevitable, a CVL provides a clear, professional path forward.
