When a company is in serious financial trouble, it faces a serious dilemma. An insolvent company needs to decide between a CVL (Creditors’ Voluntary Liquidation) or Administration. A CVL is about closing the business down, and Administration refers to trying to save a business. Both options need to be considered carefully. In this helpful blog post, we’ll explore the pros and cons of a CVL and Administration to provide clear guidance
What Is Creditors’ Voluntary Liquidation
According to GOV.UK’s director information hub, ‘CVL is when the directors take steps to close down the company.’ When a business is unable to pay its debts or owes more than it owns, it’s faced with the decision of going into liquidation. The CVL process is initiated by the directors and shareholders. An Insolvency Practitioner is then appointed to take control of the company. Their job is to realise the assets and distribute any funds to creditors before the company is formally closed.
What Is Administration?
Administration is a formal rescue process designed to save an insolvent company. In the case of Administration, the company is struggling, but there is still a chance it can survive. According to GOV.UK business guide, ‘The Administrator will write to your creditors and Companies House to say they’ve been appointed – they’ll also publish a notice of their appointment in The Gazette.’ The purpose of administration is to help save jobs so your business continues. It also helps creditors get more back than they would if the company entered Liquidation.
CVL vs Administration: Key Differences
There are important differences to understand before choosing CVL vs Administration. Starting with the primary objective, as a CVL focuses on closing an insolvent company. The objective of Administration is to save the company and achieve a better outcome for creditors. Let’s further break down the key differences between the two.
CVL, or Creditors’ Voluntary Liquidation, is a process initiated by the directors andshareholders of an insolvent company to liquidate its assets and distribute funds to creditors before the company is formally closed. Once the CVL process begins, there is no longer an opportunity for business continuation, and directors lose control of the company. A CVL is lower in cost and a quicker process than administration, as there are less statutory obligations and fewer strategic decisions to be made than attempting to save a business.
During a CVL, employees are normally made redundant andmay be able to claim certain entitlements. Creditor returns are often limited, depending on the company’s remaining assets. The public perception will vary for directors. During this process, they may be subject to scrutiny, and their conduct before liquidation will be assessed.
We’re often asked, ‘what happens when a company goes into Administration?’ During Administration, business resumes with some key changes. Directors no longer manage the business day to day but may remain involved in some capacity to support the rescue or sale. Administration can be a longer, more costly process. The overall goal is to save as many jobs as possible, improve returns for creditors and protect the business reputation. Public perception is often more positive for a company going into Administration, as there’s an attempt to save it rather than simply sellassets and liquidate.
Pros and Cons of a CVL
Advantages
- Quicker, less complicated process
- Lower costs than administration
- Straightforward closure
- Reduces risks of wrongful trading
- Allows directors to initiate the process voluntarily
Disadvantages
- Employees are made redundant
- Company ceases trading permanently
- Limited chance of rescue
- Potential for public scrutiny
- The director’s conduct is reviewed
- The company is dissolved
Pros and Cons of Business Administration
Advantages
- The business can still be saved
- Moratorium period protects against legal action
- Possible preservation of jobs
- Can deliver higher creditor returns than Liquidation
- A more positive public perception
- Can reduce director risk by demonstrating responsible action
Disadvantages
- More expensive than liquidation
- More complex process
- Not suitable for all companies
- No guarantee the business can be saved
- Period of uncertainty amongst employees
- Directors lose significant control
How To Choose Between CVL or Administration
When a CVL Is Usually Better
The CVL process is better when a company has no viable future. When there are severe cash flow issues, mounting creditor pressure and significant debt, a CVL can be the best course of action. Liquidating a business is not an easy decision. It requires careful consideration to ensure it’s the best possible option to bring a business to an orderly end.
When Administration May Be Better
Administration can be a good option for businesses experiencing short-term financial distress, but that still show signs of long-term sustainability. Debts should be manageable, and there should be genuine interest from buyers or investors. For Administration to be considered, there must be clear indications that the business has the potential to recover.
Looking For Specialist Advice? Contact Our Experts Today
The team at Griffin & King specialise in CVL and Administration. We understand it’s not an easy decision for any company. It’s why we provide expert insight to make the process clearer and more manageable, so your business can move forward with confidence. Fill out our contact form, give us a call on 01922 722 205 or send us an email at enquiries@griffinandking.co.uk.
