Company Voluntary Arrangement (CVA) vs Company Liquidation

What is the difference between a CVA and Liquidation?

While company liquidation via a Creditors' Voluntary Liquidation (CVL) and Company Voluntary Arrangements (CVAs) are both formal insolvency processes, they are in fact very different in what they set out to achieve. 

• A Creditors’ Voluntary Liquidation, or CVL is a terminal process which closes down an insolvent business which is beyond the point of rescue.
• A Company Voluntary Arrangement, on the other hand, gives a financially challenged, yet ultimately viable company, a chance to trade its way out of its current problems.

How does a Company Voluntary Arrangement (CVA) work?

A Company Voluntary Arrangement involves formal negotiations between an indebted company and its creditors, facilitated by a licensed insolvency practitioner (IP).

If agreement is reached with 75% (by debt value) of creditors, then the company's debts will be restructured in a way which allows repayment to be made over a series of affordable installments over the period of the CVA which is typically 3-5 years. Some unaffordable debt may also be written off as part of the process. 

The repayments made by the company are distributed between creditors in the pre-agreed proportions, and as long as you maintain the payment schedule, no legal action can be taken by creditors to close the business down or force additional payment from the company or the directors personally.

The key here, is that with a CVA, the company continues to operate and trade as usual.

“After submitting my '60 Second Test' I received a complimentary Insolvency Options guide packed full of useful information. The team of insolvency specialists phoned me back in less than 10 minutes after reviewing my details and guided me through the next steps. Really helpful! Thank you Sophie!”

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Sophie Schofield
Business Debt Expert

CVA as an alternative to company liquidation

One of the main eligibility criteria for a CVA is long-term viability. The insolvency practitioner (acting as nominee of the proposed CVA) must believe that the business is able to sustain the new payments for the full term of the arrangement, as if the CVA fails at any point creditors can petition to wind up the company.

It may be the case that you only repay a proportion of the original debts, and the remainder are written off. Either way, a CVA offers you the chance to continue trading without unmanageable and burdensome debts and relentless creditor pressure, and can be a good option if the circumstances are right.

What is Creditors’ Voluntary Liquidation?

A Creditors' Voluntary Liquidation (CVL) is a formal liquidation process which brings about the end of an insolvent company. Unlike with a CVA, a company entering into liquidation will no longer be able to trade, and the company's affairs will be wound down in an orderly manner before the company is struck off the Companies House register. At this point it will cease to exist as a legal entity.

Sometimes a CVL is the only available option for failing businesses. If this is the case, it can benefit directors as well as creditors by relieving the pressure of trying to rescue a collapsing company.

As a director you have a degree of control over the process – you can appoint your own choice of liquidator and decide when to enter liquidation. This would not be the case if you let the situation escalate to the extent that a creditor petitioned the court to force your company into liquidation. In the event of a compulsory liquidation, you would have no say as to when the company entered liquidation, nor whom the appointed liquidator would be.

Having entered into a CVL, the liquidator sells the company’s assets to provide creditors with the maximum dividend possible. 

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CVA or CVL: Which is right for your company?

Both CVAs and CVLs are extremely effective processes in their own right – it’s the circumstances of your business that dictate which one represents the best course of action. There may also be other suitable formal insolvency procedures available, or perhaps informal options such as additional funding.

An insolvency practitioner will be able to assess whether the company can be rescued, and offer professional advice and guidance. If your company is fundamentally viable and suffering short-term financial distress, a CVA may be appropriate.

How Real Business Rescue can help

It’s imperative to obtain professional guidance as early as possible, as you may have more options available. If your company is already insolvent, or you believe it will be in the near future, you have a legal duty to place the interests of your creditors above those of yourself and your fellow shareholder. Taking advice from a licensed insolvency practitioner at this stage can ensure you adhere to these legal obligations.

Real Business Rescue are insolvency specialists and can provide the reliable independent advice you need. Please get in touch with our partner-led team to arrange a free, same-day consultation.