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What happens if a CVA is rejected or its terms are failed?

A Company Voluntary Arrangement, or CVA, is a common solution for struggling, but fundamentally viable companies, that allows directors the opportunity to trade their way out of debt.

It is an appealing option because interest and charges on the debt are frozen, creditor action is halted, and repayments consolidated into a single payment each month. The success of a CVA depends on careful planning and skilful negotiation, however, as it is all too common for creditors to reject the terms, leaving the company looking for other ways out of their predicament.

The CVA process

Once a draft agreement is in place, it is reviewed by directors and then submitted to court, with a copy going to each creditor. The document then has to be accepted by two groups – shareholders and creditors.

A shareholders’ meeting is held first, where a minimum of 50% of shareholders (by value of shares) are needed to approve the document. This is closely followed by a meeting of creditors, during which voting takes place to accept or reject the terms.

In the case of creditors, 75% (by value of debt) are required to vote in favour of the agreement for it to be passed. So there are two instances where a CVA’s terms may be rejected. If an effective plan to rescue the company has been developed, however, it is unlikely to come up against strong opposition.

If the Company Voluntary Arrangement is rejected

Should the CVA be rejected by either shareholders or creditors, you will need to consider alternative insolvency options. Sometimes creditors feel that better returns would be achieved using a different option, or assume that compulsory liquidation is the preferable route.

This is generally not the case in practice, however, as unsecured creditors are placed last in line for repayment in such circumstances. A well-constructed CVA offers at least some recompense, and when compared with the likelihood of receiving a payment via liquidation, can provide the best outcome for creditors.

What are the alternatives if CVA terms fail?

Various options remain even when a CVA is rejected. Which one is most suitable depends on the circumstances of individual businesses, but options may include:

Entering administration

By entering administration you can protect the company from creditor action, but there is a time limit of eight weeks in which to formulate a plan to rescue/restructure the business. This could include selling it as a going concern if the underlying business is viable and the company has had relatively predictable cash flow on the whole, but there are strict regulations surrounding administration as an option.

Pre pack administration

Pre pack administration involves marketing the business before an administrator is appointed, to enable a quick sale and minimise the threat of the bad publicity which could affect future trading levels. It is often the case that directors buy the business assets, setting up a new company without debt. Again, strict rules are in place to prevent abuse of this system, and it has to be established beyond doubt by an insolvency practitioner that this solution would provide the best outcome for creditors.

Creditors’ Voluntary Liquidation (CVL)

If creditors refuse to accept the terms of a CVA, then Company Voluntary Liquidation may be the only way to avoid compulsory winding-up. As we said earlier, the availability of these options vary depending on each business case, but by choosing a Creditors’ Voluntary Liquidation directors are placing creditor interests to the fore.

Business assets will be liquidated using this option, but directors are less likely to undergo investigation for their conduct. Compulsory liquidation involves thorough scrutiny of director actions, and in some cases can lead to accusations of wrongful or unlawful trading.

Begbies Traynor has a long history of successful company restructure and rescue. Call to arrange a same-day consultation to discuss your options, and obtain the advice you need.

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