What happens if a CVA is rejected or fails?

What happens if a CVA is rejected or fails?

What is a CVA?

A Company Voluntary Arrangement (CVA) functions as a formal payment plan which is entered into between a financially distressed company and its outstanding creditors. A CVA gives the company longer to pay back the money it owes to creditors through a series of more affordable monthly repayments, allowing 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 not suitable for all businesses experiencing financial distress.

Potential issues with CVAs

One of the main stumbling blocks is that a CVA proposal must be accepted by at least 75% of creditors (by value) before it can become legally-binding. If this level of approval from creditors cannot be achieved and the CVA proposal is rejected by creditors, the company will unfortunately have to consider alternative options for dealing with its debts. 

Secondly, if a CVA proposal is accepted by creditors, the company must then keep up with the agreed monthly repayments for the duration of the CVA which is typically 3-5 years. Failure to keep up with the terms of the CVA can lead to it being terminated. If payments towards the CVA are missed, the appointed insolvency practitioner is duty-bound to intervene and bring the CVA to a close if it is no longer deemed suitable for the insolvent company.

Can my CVA proposal be rejected by creditors?

As previously stated, a CVA requires the company's creditors to give their approval prior to it becoming legally-binding. 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.

“Spoke with Chris who put me at ease straight away. He was very knowledgeable and listened intently to all my worries and concerns. Will definitely be using Real Business Rescue and advise anyone with business issues to give them a call.”

Diana

 

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Chris Bristow
Business Debt Expert

What happens if I fail to keep up with the CVA payments?

Following the successful implementation of a CVA, you will be required to make the agreed monthly repayments directly to your insolvency practitioner who will then distribute this money amongst your creditors as per the terms of the CVA proposal. 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. It may be possible for the terms of your CVA to be revised, allowing for lower monthly repayments going forwards; this can be negotiated by extending the duration of the agreement meaning you pay less each month but for a longer period of time.

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Alternatives to a CVA

Amending an existing CVA 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 via a formal liquidation process. Although this is undoubtedly a difficult step to take, sometimes it is the only way to move beyond your current issues.

How Real Business Rescue can help

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 consultation with a licensed insolvency practitioner. With nationwide offices, Real Business Rescue can offer unparalleled director advice across the UK.