When introducing a process or change to your company, it is naturally important that you know what impact it may have. What is equally important, though sometimes not given due attention, is the impact these actions will have on directors. This is true for every meaningful action, for both solvent and insolvent companies, and is no less applicable to a Company Voluntary Arrangement (CVA).
In this article, Clarke Bell details how a Company Voluntary Arrangement will affect directors. Ensuring you have the necessary information to make the right choice for you and your company. We will also discuss how a Creditors’ Voluntary Liquidation (CVL) may in fact be a better option.
What is a CVA?
Put simply, a CVA offers insolvent companies the means to renegotiate payment terms with outstanding creditors. With it, companies can agree to extend the life of a loan. Adjust the amount that must be paid each month, and even write off a portion of the debt. Moreover, if a company’s creditors sign on to a CVA, they will be unable to launch legal action against the company in question. If you fear your company being forced into a compulsory liquidation by impatient creditors, a CVA may not be the best option.
A CVA must be agreed to by the majority of creditors, and so in the event that the creditors won’t agree to it, the best option for the company may be a Creditors’ Voluntary Liquidation. In fact, it’s now more common for directors to choose a CVL and start afresh.
How will a CVA affect directors?
The advantages to a CVA are clear for companies. Debts repayments can be adjusted, extended, or written off outright, and the company is protected from legal action. But how does the procedure impact directors?
First and foremost are a director’s obligations. Directors of insolvent companies must uphold their obligations to creditors. Namely that they will act in their best interests and do everything possible to make repayments. In some cases, the best way to meet this goal is to liquidate the company and distribute the proceeds amongst company creditors.
This can be achieved through procedures such as a Creditors’ Voluntary Liquidation (CVL). However, this isn’t always the most appropriate course of action, and can also lead to negligent directors receiving penalties at the end of the CVL’s investigation.
As aforementioned, a CVA offers protection against legal action. Moreover, it can often be the more appropriate option for your creditors. If your company has a viable business model underneath its debt, trying to realise its potential is beneficial to both you and your creditors. In doing so, you can uphold your obligations to your creditors, while benefiting from the other advantages of a CVA.
Current directors can continue running the company
While other methods of addressing a company’s debt, like a CVL, can remove the current directors from management positions, this is not often true for a CVA. While some creditors will demand a change in leadership as part of the agreement, this scenario is incredibly rare. Current directors also have no legal obligation to step down or bring new personnel into leadership positions. As such, you can rest assured that you will be able to keep running your company as you wish.
Although you have no obligation to change your company’s leadership, it could be a good idea to do so. Fresh eyes and minds can be exactly what an ailing company needs. A CVA can be the perfect motivation to make changes. Bringing in new people with different outlooks can help you bring your company back from the brink and avoid future pitfalls. Additionally, you may be able to leverage the prospect of new leadership in your CVA negotiations. Achieving better terms than you might otherwise.
Directors are not investigated as part of a CVA
A core part of other procedures is to open an investigation into the conduct of current directors. This is done with a view to determining why the company has failed, and whether director conduct has anything to do with it. A CVL, for example, usually involves an investigation in the early stages of the procedure.
It’s important to note though, if a director hasn’t done anything wrong then they have nothing to fear from a CVL. The vast majority of CVLs progress without any implications for the directors.
With a CVA, no such investigation will take place. This is for two reasons; the company is not being liquidated, and the process is in the best interests of the creditor. The company will carry out business as usual, with the only certain changes being the newly agreed-upon repayment terms. This protects directors from the penalties associated with negligence or misconduct. Such as a disqualification of up to 15 years, personal liability for company debt, and a potential prison sentence.
Though the impact on directors has been beneficial thus far, a CVA does have its negatives. Reputational damage is one of the notable negative impacts the process can have on directors. It is essentially the admission of inability to pay back debts. This can be interpreted by future creditors as a risk factor, potentially harming your chances of securing new finance. However, by putting your creditors’ interests first and attempting to revitalise the company, if successful, can have the opposite effect. Your actions in this case may well be advantageous, as future creditors have proof of your willingness to uphold your obligations.
How are personal guarantees handled under a CVA?
Although a CVA protects you from assuming personal liability for company debt, this protection does not extend to debts secured by a personal guarantee. If your company defaults, these debts will be transferred to you, putting your personal finances at risk.
However, you still have the option to pay these debts through the CVA. Though this must be done using your personal finances, you can negotiate the repayment terms just as you would under any CVA. This can help mitigate the financial pressure you will likely feel, especially considering the impact of having your company default.
Clarke Bell can help you
Negotiating the best terms for your Company Voluntary Arrangement can be a challenge, but Clarke Bell is here to help. We have over 28 years of experience helping companies through dire financial straits, both through a CVA and otherwise. Our experts can determine whether a CVA is right for you, and help you secure favourable repayment terms. For more information, don’t hesitate to contact us today for a free, no-obligation consultation, and find out what we can do for you.