Updated: 15th January 2020
A company can enter into a CVA, or a Company Voluntary Arrangement, if it is experiencing financial issues. A CVA is essentially a payment plan which is entered into between a company and its outstanding creditors. It gives the company longer to pay back the money it owes through a series of more affordable monthly repayments. This allows the company to continue trading, return to profitability, and reduce its debts.
The idea of a CVA is often very appealing to company directors who are struggling with unmanageable debt; however, this type of arrangement is only suitable for a relatively small number of businesses. A CVA can only be entered into under the guidance of a licensed insolvency practitioner, and its implementation must be accepted by creditors who total at least 75% of the debt.
As previously stated, a CVA is not suitable for all companies. In order to get the approval from the required 75% of creditors, you need to be able to prove not only that your company has a good chance of being profitable in the future, but also that you are capable of making the monthly repayments for the duration of the CVA. If your creditors are in any doubt about either of these two factors, it is likely your CVA proposal will be rejected.
In this instance, you have a tough decision to make. You need to decide whether you can afford to pay your creditors what they are demanding, or consider whether you may now have to walk away from the company for good. Should you decide to close a limited company with outstanding debts, this will have to be done by way of a Creditors’ Voluntary Liquidation (CVL). If your CVA proposal is rejected, your insolvency practitioner will be able to advise you on the best way forward
Following a successful CVA application, you will be required to make the agreed monthly repayments directly to your insolvency practitioner who will then distribute this money evenly amongst your creditors. Failure to make these agreed monthly payments will constitute a breach of the CVA terms which could have huge consequences for the future of your company.
While in a CVA, if at any point you are aware that you may struggle to make upcoming payments, you should make it a priority to notify your insolvency practitioner of this. It may be possible for the terms of your CVA to be revised, allowing for lower monthly payments going forwards; this is often achieved by extending the duration of the agreement meaning you pay less each month but for a longer period of time.
However, amending an existing arrangement needs creditor approval just like when you initially set up the CVA. If you do not receive approval, then it is likely the CVA will be terminated. At this stage, you will then have to seriously consider not only what you would like for the future of your business, but crucially, whether this is affordable. Unfortunately, it may get to the stage where your company’s debts are simply too high for you to manage, and you are left with little other option but to close down the business. Although this is undoubtedly an extremely difficult choice to make, sometimes it is the only way to move beyond your current issues.
If your business is experiencing financial worries and you are considering entering into a CVA, or if would like to discuss other business recovery options, contact Real Business Rescue today. We will take the time to understand your situation and recommend the best course of action for both you and your company. You can arrange a same-day appointment with a licensed insolvency practitioner, With 78 offices stretching from Inverness down to Exeter, Real Business Rescue can offer unparalleled director advice across the UK.