Updated: 12th January 2021
The coronavirus pandemic has led to severe financial distress for businesses industry-wide, with many having to take swift and drastic action to prevent total closure. Fortunately, the UK operates a supportive regime of insolvency support for struggling businesses, and a Company Voluntary Arrangement (CVA) is a common route out of difficulty.
But what happens if you breach a CVA due to coronavirus? Can you recover from this, or does it mean certain closure for your business? Defaulting on repayments to a CVA is a serious issue and could result in its failure, but in some cases you may be able to secure a variation to the terms of your arrangement.
Your insolvency practitioner (IP) needs to know as soon as possible if you can’t make a CVA payment. The sooner they’re aware of a problem, the better the chances of negotiating a variation with your creditors.
Success in this respect often depends on how long the agreement has been in place – if it came into force less than 12 months ago, for example, creditors may be unwilling to agree new terms unless the problem was unforeseeable when the arrangement was initially set up.
As with the original agreement, 75% of creditors (by value of debt) need to vote in favour of a change, but if creditors don’t accept the proposal for a variation or the CVA fails before a vote takes place, there may still be options available to your business.
The UK insolvency framework offers various options, but your eligibility depends on the circumstances you’re facing. Company administration and pre pack administration are just two potential routes away from liquidation.
Company administration offers protection from creditors for a moratorium period of eight weeks. During this time the appointed administrator formulates a plan, with a firm focus on business recovery.
Pre pack administration involves the sale of underlying business assets to new owners, or sometimes to the existing directors if they have sufficient personal funds to make the purchase.
It’s crucial to inform the insolvency practitioner administering the CVA as soon as you know you’re going to breach the terms. The sooner you let them know, the more likely you’ll be able to arrange a variation or take aversive action against compulsory winding up by a creditor.
When a CVA does fail, your business loses the legal protection from creditors that’s vital for recovery. One or more of your creditors may decide to petition for your winding up so time is of the essence in this situation - once a winding up order has been granted by the court, the timeline to take aversive action narrows considerably.
Real Business Rescue are insolvency specialists and can provide the reliable unbiased advice you need. Coronavirus has created new and challenging circumstances for businesses around the UK, but our national presence means you’re never far away from professional advice
We work with over 50 lenders nationwide if you need access to emergency finance, so give our partner-led team at Real Business Rescue a call to arrange a free same-day consultation. We’re a major part of Begbies Traynor Group, the UK’s largest professional services consultancy, and we operate offices around the country.
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