Company Voluntary Arrangement (CVA) vs Company Liquidation

What is the difference between a CVA and Liquidation?

While company liquidation and 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 has gone 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.

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How does a CVA work?

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

If agreement is reached with 75% of creditors (by debt value), 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 debt may 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.

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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 the business can 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 start again without debts and relentless creditor pressure, and can be a good option if the circumstances are right.

What is Creditors’ Voluntary Liquidation?

Sometimes Creditors’ Voluntary Liquidation 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. When the process is complete, the company is removed from the register and ceases to exist.

Benefits of entering a CVL

Although it means the company closes down, Creditors’ Voluntary Liquidation does offer certain benefits. It allows you to meet your legal obligations as a director, relieves creditor pressure, and allows you to move forward.

It can also entitle you to claim director redundancy pay. If you’re wondering how your company would pay for an insolvency process when it’s being liquidated, many directors claim redundancy pay and use some of the money to cover the costs.

The fact that you can meet your legal obligations is also important, as if you fail in this respect you could be disqualified or even held personally liable for the company’s debts.

CVA or CVL: Which is right for your company?

The two processes are extremely effective 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 would 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.

Seek insolvency advice

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 obligation to seek support from a licensed IP.

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. We work from offices throughout the country, and can quickly provide support wherever you’re based.