A Company Voluntary Arrangement (CVA) is a procedure which enables a company to put a proposal to its creditors for a composition in satisfaction of its debts or a scheme of arrangement of its affairs. A composition is an agreement under which creditors agree to accept a certain sum of money in settlement of the debts due to them. The procedure is extremely flexible and the form which the voluntary arrangement takes will depend on the terms of the proposal agreed by the creditors. For example, a CVA may involve delayed or reduced payments of debt, capital restructuring or an orderly disposal of assets.
The proposed arrangement requires the approval of at least 75% in value of the creditors, and once approved is legally binding on the company and all its creditors, whether or not they voted in favour of it. There is limited involvement by the court, and the scheme is under the control of a Licensed Insolvency Practitioner acting as a supervisor.
The CVA procedure was introduced by the Insolvency Act 1986 and was designed primarily as a mechanism for business rescue. The procedure is also often used instead of liquidation as a means of distributing funds on the conclusion of (and, occasionally, during) an administration.
A modified CVA may also be applied to insolvent partnerships.
Compulsory liquidation (or compulsory winding up) is instituted by an order made by the court, usually on the petition of a creditor, the company or a shareholder.
There are a number of possible reasons for making a winding-up order. The most common is because the company is insolvent. Insolvency is usually established by failure to comply with a statutory demand requiring payment within 21 days, or by execution against the company’s goods being returned unsatisfied. A winding-up petition may also be presented by the Secretary of State for Trade and Industry on the grounds of public interest.
In a compulsory liquidation the function of liquidator is in most cases initially performed by an official called the Official Receiver (OR). The OR is an officer of the court and a member of the Insolvency Service, an executive agency within the Department of Trade and Industry. In most compulsory liquidations, the OR becomes liquidator immediately on the making of the winding-up order. Where there are significant assets an Insolvency Practitioner will usually be appointed to act as liquidator in place of the OR, either at a meeting of creditors convened for the purpose or directly by the Secretary of State for Trade and Industry. Where an Insolvency Practitioner is not appointed the OR remains liquidator.
A Creditors’ Voluntary Liquidation (CVL) occurs where the shareholders, usually at the directors’ request, decide to put a company into liquidation because it is insolvent (i.e. it cannot pay its debts when they are due).
A CVL is under the effective control of the creditors, who can appoint a liquidator of their choice. The CVL is the most common way for directors and shareholders to deal voluntarily with their company’s insolvency.
Insolvency Practitioners are licensed to advise on, and undertake appointments in, all formal insolvency procedures.
Clarke Bell are professional and experienced Licensed Insolvency Practitioners, based in Manchester and working with clients throughout the UK.
Liquidation (or ‘winding up’) is the most common type of corporate insolvency procedure. Liquidation is the formal winding up of a company’s affairs entailing the realisation of its assets and the distribution of the proceeds in a prescribed order of priority. With few exceptions, liquidation is the end of the road for a company and following liquidation it will be removed from the companies register. Liquidation may occur following a receivership or administration.
Liquidation may be compulsory (when it is instituted by order of the court) or voluntary (when it is instituted by resolution of the shareholders).
An insolvent voluntary liquidation is known as a Creditors’ Voluntary Liquidation (CVL).
A solvent voluntary liquidation is known as a Members’ Voluntary Liquidation (MVL).
The role of a Liquidator of a company in Compulsory Liquidation is to realise the assets and make payments to creditors.
An Official Receiver (OR) will normally act where the matter is straight forward. (The OR is an officer of the court and a member of the Insolvency Service, an executive agency within the Department of Trade and Industry.)
Where there are significant assets or the matter is complicated, the OR will normally appoint an Insolvency Practitioner in their place.
A solvent liquidation is known as a Members’ Voluntary Liquidation (MVL). To place a company into an MVL, its assets much be enough to settle all its debts with 12 months.
MVLs may be used for purposes of reorganisation, or in the case of owner-managed businesses to enable the shareholders to realise their interest in the company – perhaps to retire or get a PAYE-role.