Updated: 8th February 2021
A Company Voluntary Arrangement, or CVA, offers an alternative to liquidation if your company could be viable in the future. Your appointed insolvency practitioner (IP) will look in detail at the company’s financial situation, and if a return to profitability is possible with a little restructuring and/or cash injection, the CVA route may be recommended over a voluntary liquidation.
If the financial position of your company has become so serious that a forced liquidation is on the cards, there may be no alternative but to close your company voluntarily through a Creditors' Voluntary Liquidation (CVL). This will be a last resort for your IP, however, as their aim is primarily to keep the company going if this is deemed possible.
Insolvency may have been a threat for some time, and directors should be aware of the company’s financial position, but taking action should not be delayed any further, as accusations of wrongful trading could follow if an investigation takes place.
There are many advantages to opting for a CVA which are detailed below, but first let’s take a look at one of the alternatives to a CVA - a Creditors’ Voluntary Liquidation (CVL).
Sometimes creditor pressure becomes so overwhelming that directors find it a relief to enter a CVL. Unless personal guarantees have been provided for company debt, outstanding monies owed are written off during the process, and creditors are unable to take any further action against you.
This offers you the freedom to move onto other business ventures or enter employment, without fear of repercussions further down the line. On liquidation, hire purchase agreements and leases may be cancelled with no further obligation to the lender, who claims any arrears from the sale of company assets.
Although members of staff will lose their jobs, they will be able to claim redundancy pay either via the sale of assets or through the National Insurance Fund.
But what about the costs of taking this route? It is generally one of the cheaper options for companies in distress, requiring funding only for the IP’s production of a Statement of Affairs and the arrangement of a creditors meeting.
Professional fees for administering a CVL are deducted from the sale of assets, so in financial terms, this could be the best route out of insolvency if you want to close the business. Another factor to consider, however, and one that could make this a risky option, is that the actions of all directors leading up to the insolvency will be investigated by the IP.
If you or any other directors are found to have traded unlawfully or wrongfully, you may face serious repercussions including financial penalties, director disqualification, and even a prison sentence.
By opting for a creditor’s voluntary liquidation, you avoid your company being forcibly wound-up by one or more of your creditors. Should you decide to start another company, this would be an important factor in attracting new business as you will have taken responsibility for the company’s financial decline and attempted to maximise creditor returns.
Many directors prefer to retain control of their company and attempt to steer it out of trouble. If this is the case and your IP has found that the underlying business is viable, a Company Voluntary Arrangement may be a better option.
One of the main advantages of this option is that creditor action is stopped once the terms of the CVA have been agreed. This requires a majority vote of 75% (by debt value) of all creditors who are to be included in the arrangement.
As a director, you can stop worrying about creditor pressure and focus on changing your company’s financial fortunes. The terms of a CVA are legally-binding on all parties which provides a reassuring element of certainty to all concerned. As well as providing the company with a second chance, however, it also means that creditors retain your trade – albeit using different payment arrangements.
The CVA process involves your insolvency practitioner drafting a proposal for the agreement of company directors, and lodging it with the court. It is then distributed to all creditors, who are invited to vote on its acceptance.
Depending on what your company can afford to pay, some debts may be written off as part of the process, with the remainder repaid over a longer period of time - typically 3-5 years - and plans will likely be put in place to alter operational procedures or sell some of the company’s assets in order to improve the overall financial situation.
It only takes one event in the life of your business to disrupt positive cash flow. A general decline in the market or loss of a key customer can be devastating to business, and easily starts a decline into insolvency.
Begbies Traynor is the market leader for company restructure and turnaround. Make an appointment today for a free consultation to discuss your options.