A Company Voluntary Arrangement (CVA) is a process that aims to turn around and rescue an insolvent business. It is an agreement made between the director and creditors that allows the company to repay its debts over a fixed time period.
Although a CVA aims to rescue an insolvent business and restore it to profitability, inevitably, any business considering this as an option will want to know what happens when a Company Voluntary Arrangement fails.
To help, Clarke Bell has put together this useful guide explaining what a CVA is and what happens when one fails.
Company Voluntary Arrangement explained
As we have mentioned, a CVA is an option taken by struggling businesses that are looking for a route to business rescue. By entering into a CVA, companies aim to avoid having to go into liquidation.
A CVA is a formal legal process and as such, it must be carried out by a licensed Insolvency Practitioner.
The Insolvency Practitioner works closely with the director of the struggling business and their accountant to create a plan outlining how the company aims to pay creditors back what they owe. The Insolvency Practitioner will also draw up a timetable to which they will do so, this usually lasts anywhere between 3 – 5 years.
In order to progress, the CVA has to be approved by 75% of creditors and 50% of shareholders.
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Who can enter into a CVA?
That’s how a CVA works, now let’s look at who can enter into one.
The following criteria must be met for a company to qualify to enter into a CVA.
Firstly, the company must be insolvent, meaning they can’t repay their debts or cover day-to-day costs and bills.
Secondly, the Insolvency Practitioner must have grounds to believe that the business has real chances of recovery.
Finally, the business has to be able to project cash flow forecasts that show that they will have the money to make the payments outlined in the agreement.
How does a CVA fail?
That’s how a Company Voluntary Arrangement works and who can apply for one, so how does one fail?
A CVA will fail when the obligations and terms outlined in the proposal aren’t met. This usually means that the company has failed to make the agreed monthly payments.
A CVA is a legally binding agreement made between the company and creditors. For this reason, failure to keep up with CVA payments is a serious matter and means you are breaching the terms outlined in the agreement which brings the CVA may be brought to an end.
If this is the case, you must know what to do next.
What happens when a CVA fails?
When a CVA fails the debt owed will no longer be bound to the CVA. This means it will start accruing interest again.
The Insolvency Practitioner must write to creditors to tell them that the agreement has failed alongside a certificate of termination. The appointed Insolvency Practitioner will no longer be in charge of managing and overseeing the debt that was bound by the CVA.
If the Insolvency Practitioner is informed about your difficulty to make repayments as soon as possible, they are able to propose a variation to creditors. This is a request to change the terms of the agreement in order to make the payment terms more achievable.
75% of creditors must agree to this in order for it to pass.
However, if this is rejected by the creditors, the CVA will fail. In order to avoid your company being wound up and forced into liquidation, you will need to look at what options are open to you.
Options when a CVA fails
One option when a CVA fails is to find another route for company recovery through a pre-pack administration.
This is a process that puts an insolvent company into administration and then involves selling the company and its assets.
The sale of the business has to be arranged before the company enters administration, ensuring that a suitable buyer has been found. An Insolvency Practitioner is appointed to carry out the process and will be responsible for negotiating and agreeing the terms of the sale.
Creditors’ Voluntary Liquidation (CVL)
Another option is Creditors’ Voluntary Liquidation (CVL), however rather than an option for business recovery, this is a route that closes the company.
Although a CVL results in the closure of the company, it does mean that the business can avoid being forced into compulsory liquidation.
What’s more, a CVL highlights that the company director is taking steps to pay back their debts and meet their obligations to creditors.
With a CVL, the company is liquidated, meaning its assets and liabilities are correctly dealt with before it is dissolved. The final stage of the CVL sees the company being struck off the Companies House Registrar.
Again, this is a formal legal process, meaning an Insolvency Practitioner has to be appointed to carry it out.
Whatever your situation, Clarke Bell are here to help
Whether you are considering entering into a Company Voluntary Arrangement, or are worried about the terms of your agreement, Clarke Bell can help every step of the way.
Our team of experts has over 25 years experience and has worked with businesses across the UK on cases of all kinds. We will work closely with you to get to know your situation and find the best solution going forward.
Alternatively, if you believe pre-pack administration or Creditors’ Voluntary Liquidation are better options, we can help to advise on the best path for you.
Get in touch with one of our friendly team members today and see how we can help you.