Company Voluntary Arrangement CVA v’s Insolvent Company Liquidation

What is a Company Voluntary Arrangement CVA?

A negotiated arrangement to repay those owed money by a company on terms that are agreeable to both the company under the CVA and those owed money by that company.

Those owed money by the company under the CVA will agree to new payment terms that can include a reduction in payment amount along with a deferral of when payment is made. In short less than the full amount owing could be paid over a longer period.

A cash flow forecast will prove the future viability of the company proposing the CVA.

Once in a CVA the company will have to stay up to date with payments to suppliers, HMRC and lenders for goods and services supplied to them after the CVA has started.  Therefore, the company must stay solvent going forwards or the CVA will fail.

 

What is an Insolvent Company Liquidation?

An end of road solution for a company that cannot continue to trade because it can’t pay those it owes money to.

An Insolvent Liquidation can be part of a restart for a business. This could be using a new company.

 

Why Use a CVA?

A CVA allows for a company, that might otherwise cease to trade, to continue in business and make payments back to those is owes.

The acceptance of the CVA proposal by those owed money will give a firm footing for business to trade forwards.

A viable business that is profitable at the time of the CVA but could not pay money due from a previous unprofitable period of trading is given the opportunity to make payments from future profits to clear older debts on new terms, agreed with those owed money.

 

Why Use an Insolvent Liquidation?

When company debts are mounting and the prospect of catching up with payment of debts is becoming less and less likely. Then it may be time to bring a company to close.

If a company can’t pay everything it owes when it closes; then an insolvent liquidation is the likely to be the best option.

 

What Happens Once a CVA is in place?

It is common that a CVA will be based on payments from future profits of the company. In this case the company under a CVA will trade forwards and make payments into the CVA “pot” which is held by the Supervisor of the CVA (a licensed insolvency practitioner).

The pot is then paid out to the CVA creditors as set out in the CVA proposal.

 

What Happens Once an Insolvent Liquidation is in Place?

The company must have ceased to trade before a liquidation is in place.

The liquidator of the company must do the following:

  • Get the most money for anything the company owns or is owned
  • review the company’s activity and financial records for wrongdoing
  • take steps recover money into the company if any wrongdoing is found
  • send a report to the UK government on the findings from the liquidator’s review
  • make a payment to those owed money by the company from any money in the company

 

Effect of a CVA on a Company

It is not necessary for a company to inform 3rd parties who are not involved in the CVA that a CVA is in place.

However, a record of the CVA is required to be held at Companies House on the company’s record.

 

Effect of an Insolvent Liquidation on a Company

The liquidator of the company is in control of the company. The company directors are no longer in control.  The company directors must assist the liquidator.

 

Effect of a CVA On Those Owed Money (the CVA creditors)

The CVA proposal sets out the terms of the CVA which includes repayment levels and timeframes.

Provided the terms of the CVA proposal are followed by the company in CVA then those owed money will be deemed to be paid in full at the end of the period of the CVA.

 

Effect of an Insolvent Liquidation On Those Owed Money (the Liquidation Creditors)

Once the company is in liquidation then those owed money will lose the right to take action to recover any money owed to them by the company. The liquidation creditors will be required to wait for the company liquidator to complete their work before any payments may be made to those owed money.

 

How Much Does a CVA Pay Those Owed Money?

The repayment level is set by the company entering the CVA. The CVA creditors have an option to accept or reject the repayment terms set out in the CVA proposal.

A majority of those owed money must approve a CVA proposal. Approval by voting and includes a vote per pound due to a CVA creditor, the more a CVA creditor is owed the more votes they have. 75% of all creditors who vote and 50% of non-associated creditors who vote must vote to approve a CVA proposal.

Repayment levels vary across CVAs with repayment in full being the most desirable outcome for CVA creditors.

 

How Much Does an Insolvent Liquidation Pay Those Owed Money?

As the company is insolvent it is unlikely that the liquidation creditors will be paid in full. Depending on the worth of what the company owns and is owed a payment to creditors, called a dividend, may be paid. This can be as little as nothing.

A company in insolvent liquidation is not allowed to trade and as such cannot generate profits from future trading. This prevents any profits being available to pay to those owed money by the company.

 

Effect of a CVA on Company Contracts and Commitments

As 75% of company creditors (by value) are needed for the approval of a CVA it is possible that some creditors that are not in favour of a CVA may be committed to the CVA. This can mean that the terms of payment for money due to an unsupportive creditor can be changed without their approval.

 

Effect of a Liquidation on Company Contracts and Commitments

The liquidator of a company has the power to break contracts and default on commitments.

 

Can a Company Trade When in a CVA?

Though not always the case, the most common structure for a CVA is a repayment to CVA creditors from profits from trading during the period of the CVA.

 

Can a Company Trade When in an Insolvent Liquidation?

The company must have ceased to trade before a liquidation is in place. The company cannot trade once in liquidation and the liquidator cannot trade the company.

 

Can the Business of a Company Continue in a CVA?

Yes.  It’s common for a business to carry on during a CVA and payments to the CVA creditors from the CVA “pot” are funded from the future trading of the company.

 

Can the Business of a Company Continue in an Insolvent Liquidation?

Not in the company that is in liquidation, but the trade and assets of the company can be transferred to a new company. The liquidator must make sure that a fair value is paid for the trade and assets of the company that are transferred to a new company.