If a company gets into financial difficulty and becomes insolvent, the directors can apply for a Company Voluntary Arrangement (CVA), through an insolvency practitioner (IP) to continue trading. Unfortunately, it might not be possible to rescue the company, or its recovery looks increasingly unlikely. In this instance, the IP may recommend putting the company through Creditors Voluntary Liquidation (CVL).
It helps to know what your circumstances are before speaking with your IP and deciding on a course of action.
Company Voluntary Arrangements
Company Voluntary Arrangements (CVAs) are used to rescue insolvent companies, allowing them to keep trading while repaying debts to their creditors.
Directors appoint a licensed insolvency practitioner (IP), who creates a proposal to present to the creditors. Once approved, a CVA requires monthly payments towards the debt, which the company must maintain for the arrangement to succeed.
CVAs will have an impact on a company’s credit rating, and if you’re unable to adhere to the payment schedule, the CVA can fail, and you may have to proceed with liquidation.More information about CVAs
Creditors Voluntary Liquidation
Liquidation is a word that strikes fear in many directors. Often considered the last resort in cases of insolvency, liquidation involves an end to trading, closing the company and selling off assets. The company incurs no further debts; creditors will regain some of their investment, and staff are made redundant.
If a company is rejected for a CVA, or a CVA has failed, liquidation may be one of the only options left open to them. Creditors can also force a company into liquidation through a winding-up petition.
The voluntary liquidation process for insolvent companies is Creditors Voluntary Liquidation (CVL). During the process, the IP can investigate the company director(s) conduct before the company became insolvent. The IP can then suggest further action against the director if they find a reason to do so, which can lead to legal action and further ramifications.More on Creditors Voluntary Liquidation (CVL)
CVAs or Liquidation, how do they work?
A CVA can be a useful procedure to relieve pressure from unsecured creditors and allow the company to survive. The arrangement consolidates all your company’s debt repayments into one monthly instalment. This payment goes to your IP, who then distributes it between your creditors. The directors stay in control of the company during the process, which usually lasts five years.
Whether your company is suitable for a CVA depends on its individual circumstances. We can discuss these with you before deciding the best course of action.
Liquidation has several variations for solvent and insolvent companies, each working slightly differently. All forms of liquidation end with the cessation of trading, staff being made redundant, and company assets sold. At the end, the company closes.
Creditors Voluntary Liquidation (CVL), for example, is a voluntary procedure for directors of insolvent companies. The process involves an IP taking control of the company and closing it in an orderly manner. Once the company closes, any remaining debt outside personal guarantees is written off, and the directors can walk away and start a new company should they choose to.
Directors can also be investigated to ensure they have acted in the company’s best interest; both before and during the insolvency. Evidence of wrongdoing can lead to prosecution and director disqualification by the Insolvency Service. If directors have any personal guarantees invested in company assets, they could even find themselves repaying company debts with their own funds.
Additionally, a creditor can force compulsory liquidation on a company through a winding-up petition. Unless stopped, these can force a company to close, giving the directors less control over the process.
When do they work best?
Both procedures have opposing outcomes, so your desired outcome for the company will influence which you choose.
CVAs are designed to rescue companies from the threat of closure. They work best for companies with a viable business structure, which could be profitable without its burdensome unsecured debts. Trading can continue for the arrangement’s duration, which helps reduce the debt and provide a sense of continuity for the company and its customer base. Existing debts have their interest rates frozen, and the IP deals with any creditors for the duration.More advantages a CVA can offer
CVLs are designed to close insolvent companies where the levels of debt make recovery unlikely or unrealistic. A CVL offers more control than if the company were put into compulsory liquidation. Once the insolvent company closes, the directors can move on, or start a new company if they wish to do so.
A Company Voluntary Arrangement, or CVA, and liquidation are both options for insolvent companies. CVAs are designed for companies who wish to continue trading while keeping the directors in control. They allow the company to write off unaffordable debt, and to pay creditors back. There are several liquidation avenues available depending on your company’s circumstances; Creditors Voluntary Liquidation (CVL) allows directors to liquidate the company if it’s unable to pay its debts, allowing directors to move on. Compulsory liquidation is the least desirable option, usually following a winding-up petition and forcing the company’s closure.
How we can help
If you’re considering applying for a CVA, or liquidation looks increasingly likely, you should speak to us as soon as possible. Our advisors can assess your circumstances, offer free, impartial advice with no obligation, and decide which course of action is best for your company.
Book a free telephone consultation with one of our initial advisers