Any business that is insolvent or struggling financially will want to know exactly what options are open to them. There are several routes a struggling business can take from liquidation, or administration, to a Company Voluntary Arrangement (CVA).
Which route is best for you depends on the circumstances and intentions of the business. For example, a Company Voluntary Arrangement is usually the best option for directors who wish to continue trading and have a real chance of recovery.
Below explains what a CVA is and what it will mean for your business, so you can see if this is the right option for you in 2021.
What is a CVA?
A Company Voluntary Arrangement is a formal process that lets an insolvent company:
- Come to a formal arrangement with creditors over debt repayment terms
- Payback a proportion of their debts rather than the full amount (typically)
- Creates a schedule for which repayments will be made, which normally lasts between 3 – 5 years
A Company Voluntary Arrangement is a legal insolvency process that must be carried out by a licensed Insolvency Practitioner.
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To be eligible for a CVA, a company must be able to prove that it:
- Is insolvent, meaning it can’t pay its debts
- Has engaged the services of an Insolvency Practitioner who is confident that the business can recover and have a sustainable future
What are the alternatives?
As we have mentioned, there are other alternatives to a CVA.
One such alternative is administration. When a company goes into administration, no legal action can be taken against it by creditors or parties who are owed money. This means nobody can apply to wind the company up during this time.
A company will enter into administration with the aim of business recovery. A licensed Insolvency Practitioner is appointed to carry out the process and becomes the official administrator.
Another option is liquidation. This is a route taken by companies that are not likely to be able to recover. If the Insolvency Practitioner does not consider your company can be turned around, liquidation is likely to be your only option.
There are several types of liquidation, including:
- Creditors’ Voluntary Liquidation (CVL): this is a completely voluntary process initiated by the company director(s) and is an option taken by an insolvent company looking to close. 75% of the company’s shareholders must agree to progress with a CVL. Once processed, the company will liquidate, dissolve, and cease to trade.
- Compulsory Liquidation: a more serious form of liquidation, unlike Creditors’ Voluntary Liquidation, Compulsory Liquidation is forced upon a company. This is initiated by creditors who are owed money and issue a winding-up petition to the court to retrieve it. If approved, the court will appoint an Insolvency Practitioner to close the company with any funds realised (i.e., freed up) then used to pay back creditors what they are owed or a proportion thereof.
What will a CVA mean for you?
If you decide a CVA is the right option for your business over liquidation or administration, it’s important to know what is involved in the process.
Now, we will look at what a CVA involves and what this will mean for you.
The first step involved in a CVA is the proposal.
Once you have appointed a licensed Insolvency Practitioner, they will draft a written proposal outlining repayment terms and a schedule in liaison with the company’s accountant.
The director(s) will get the chance to review this and raise any queries if they wish to.
Once approved by the director(s), the Insolvency Practitioner will next write to creditors and invite them to vote at a creditors’ meeting.
Next, all creditors will meet to review the proposal and raise any concerns over it.
The approval of at least 75% of creditors is required for the CVA proposal to be approved.
At the same time, shareholders will also hold a meeting to review the proposal. Here, the approval of at least 50% is required for the proposal to be successful.
Insolvency Practitioner’s Report
Once both creditors and shareholders have approved the CVA proposal, the next step is for the Insolvency Practitioner to report on the meetings and present the votes cast to the court.
The CVA is initiated
Now the CVA can be put into motion. From here on, the company must stick to the agreed schedule of repayment to the creditors. If the director(s) stick to the terms outlined, they will be protected from any legal action being carried out against them.
If for any reason the director(s) fail to make its agreed payments, then the likelihood is that it will end up in compulsory liquidation.
What does a CVA mean for directors?
In most cases, when entering into a Company Voluntary Arrangement, the director(s) can stay in control.
Is a CVA the right option for your business in 2021?
Now you know what is involved in a CVA and what it will mean for your business, you can decide whether this is the best option for you.
This can be a great option for businesses looking to restore profitability and is something Clarke Bell’s team of CVA specialists can help you with every step of the way.
Alternatively, if you believe liquidation would be a better route for you, don’t hesitate to get in touch. Our team of insolvency experts is at hand to help advise on the best route forward for your insolvent business. Whatever your situation, we will work with you closely to find the best solution.