For financially struggling companies, it can be difficult to decide on the appropriate course of action. Bringing such a company back to solvency is a challenging task alone, but dealing with creditor pressure and looming legal action can sometimes dwarf operational difficulties. Two potential solutions are apparent for companies in such a position: a Creditors’ Voluntary Liquidation (CVL), and a Company Voluntary Arrangement (CVA).

While at first glance, these solutions may seem similar, they are, in fact, quite different. Both offer insolvent companies a unique method of dealing with their financial problems, and which one you should use will depend heavily on your situation and your view of the future. In this article, Clarke Bell will discuss both of these methods of dealing with insolvency, explain how they work, and detail some of the key differences between the two procedures.

What is a CVL?

A CVL is a formal insolvency procedure that results in the controlled winding-up of a company. It is an option taken by directors that cannot pay their creditors and liabilities, and cannot make a case for continuing the company in a different form. As such, liquidation becomes the only option left to act in the best interests of company creditors.

Once settled on as the course of action, the CVL process will see the company’s assets liquidated and accounts emptied by the appointed insolvency practitioner. The proceeds will be distributed amongst company creditors, with any remaining funds being distributed amongst shareholders. As the CVL process prioritises the interests of creditors, it demonstrates that directors have acted to uphold their obligations to creditors, thereby protecting them from accusations of director misconduct. After this distribution, the company will be wound up and stricken from the register at Companies House, ceasing to exist from this point on. For more detail on how a CVL works, read our complete guide to the procedure.

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What is a CVA?

Unlike its counterpart, the CVA does not require the company in question to close. Instead, this procedure aims to reinvigorate a company, mainly by negotiating with creditors to ease the financial pressure by creating more favourable repayment terms for the company. This can be done by a number of means, such as reducing repayment frequency, the number of repayments, or postponing repayments altogether.

Entering into a CVA requires the consent of a company’s creditors, meaning the company must be viable and have a plan that the creditors can put their faith in. Assuming creditors are satisfied, the CVA procedure can create more manageable terms of repayment for the company, and can last up to five years. Gaining the approval of your creditors can be a task of varying difficulty; you will need to convince creditors according to their value, as opposed to convincing a numerical majority. If you fail to earn the consent of creditors that make up at least 75% of your company’s debt, you will not be able to move forward with a CVA.

Also Read: Disadvantages of a CVA

Differences between the procedures

Both the CVL and CVA procedures have the same goal; to address an insolvent company’s financial issues and reach a favourable outcome for both directors and creditors. However, how they accomplish this goal is significantly different, from investigations into director conduct, to whether the company exists in the end.

The fate of the company

One of the key differences between a CVL and a CVA is the company’s state at the end of each procedure. Under a CVL, the company in question will see the liquidator take the reins, essentially taking on the responsibilities of the company’s directors. This means that, in practice, the company’s directors relinquish their control over the company once the procedure begins. With this control, the liquidator will realise company assets and accounts, leading to the eventual cessation of the company as an entity.

Under a CVA, things play out much differently. As directors negotiate with creditors to arrive at a new set of repayment terms, rather than working to liquidate the company, they retain much of the control over their company. Directors will remain in charge of the company, continuing to guide the company down the route they think is best. However, if they have made certain promises during their negotiations with creditors, directors will need to stand by these commitments. The appointed insolvency practitioner will act as a supervisor, ensuring that both directors and creditors stick to the terms of the new arrangement.

Role of the creditors

Another core difference is how much control over the procedures a company’s creditors have. Under a CVL, creditor control is essentially nothing; a company’s shareholders decide to enter liquidation, and unless creditors have taken legal action before an attempt at liquidation, they have no grounds to contest it. Creditors also have no influence over the procedure once it is underway, and can only allow the liquidation to run its course.

This is not the case under a CVA. Creditors in this procedure are the deciding factor, capable of allowing the process to happen, or blocking it entirely. If a company’s creditors don’t like the proposed changes to the loan agreement, or they think the company does not have a viable future, they can choose to withhold their consent to the CVA. This essentially stops the process in its tracks, and if the shareholders cannot put together a plan that convinces disapproving creditors, then the CVA will not be an option.

Investigations during each procedure

As part of the CVL procedure, liquidators are obligated to investigate the conduct of company directors and the company’s trading history. This must be done to ascertain whether directors had a hand in the company’s decline. Most investigations are little more than protocol, clearing directors of misconduct or misfeasance. However, if evidence of misconduct is found, the findings will be sent to the Insolvency Service, which will decide upon further action.

Under a CVA, however, there is no obligation to investigate the company’s operational history or directors’ actions. Instead, creditors will be able to note certain parts of the agreement that could be investigated at a later date, if the need arises. For example, if creditors notice discrepancies between what is included in the proposed agreement and the reality of the company, then they are entitled to bring the matter before the courts.

Clarke Bell can help

If your company is struggling with its finances, don’t go it alone – let Clarke Bell help. We have more than 28 years of experience in helping companies find solutions to their financial problems, and we can do the same for you. Our team of experts can help you identify and implement the best solution for your situation, whether it be a CVL, CVA, or otherwise. Don’t hesitate to contact us today for a free, no-obligation consultation and find out exactly what we can do for you.