What is a CVA? | Company Voluntary Arrangements Explained
A CVA or Company Voluntary Arrangement is a legally binding agreement with creditors allowing a proportion of debts to be paid back over time
ReadA business is defined as insolvent if it can’t pay its debts when they fall due. There are two main types of business insolvency:
If your business fits into either scenario, you must act fast to ensure you minimise risk for your creditors. There is also a legal action test of insolvency which is really a follow on from the cashflow test of insolvency.
All company directors should be aware of the risks of business insolvency, and its possible consequences.
It can affect the future of your business and personal life, so it’s worth investigating the options open to you even if your company is not in financial distress.
Here, we’ll explore exactly what business insolvency is and explain as much as we can about the proceedings that follow it. That way, you can be prepared for insolvency proceedings, just in case.
There are also several warning signs to look for, including:
As a director, it’s important that you are aware of all these signs. They may help you prevent business insolvency, or mitigate the consequences for you personally and for your company. Read our page on the implications for directors.
Being insolvent puts your company in danger of closing down. However, there are several options you can take once your company becomes insolvent, including some that allow the company to continue trading.
Remember, as soon as you realise your business is insolvent, you must do all you can to maximise the creditors’ interests. If you don’t, you might be made personally liable for your company’s debts.
Business insolvency can be a complex and confusing process, so it’s best to seek expert advice straight away. There are plenty of people and organisations you can turn to, including:
However, it should be borne in mind that only a licensed insolvency practitioner can take the necessary steps to protect the business or its creditors. They are an officer of the court and they are the only people that can allow debt write off in a business to be formally binding. Many insolvency practitioners will outline your options for no charge. Call us on 0800 9700539 if you want to talk to us direct.
Your options are;
It is vital that you contact your creditors as soon as you become aware of your company’s financial distress.
If your company is experiencing temporary financial difficulties, try contacting your creditors to arrange a payment plan. However, this usually only works if there is no immediate threat of formal action by creditors.
These arrangements are not legally-binding. A creditor can withdraw from the agreement at any point, but this is a good temporary solution that allows you to continue trading.
Before you make alternative arrangements, make sure you’re aware of any costs for changing your repayment terms, including how it will affect your interest payments.
Similar to the previous option, a CVA is an arrangement made with creditors to deliver money owed over a new time period.
This is a binding arrangement for all, or part of, the company’s unsecured debts and allows you to continue trading during and after the arrangement.
Administration is a bold move for companies experiencing business insolvency. However, it has many benefits; it offers respite from all creditor actions and enables the company to continue, or be sold.
The process is quite simple. You hand over your company to an insolvency practitioner (the administrator), and while they’re in charge your creditors cannot take legal action to recover their debts without the court’s permission. Although any charge holder has to be notified and may appoint their own administrator if they wish.
The administrator will draw up proposals to try any of the following.
The administrator will also decide if you can continue trading during proceedings.
Known more commonly as ‘receivership’, the holder of a ‘floating charge’ – usually a bank – initiates this option.
They appoint a receiver (a private insolvency practitioner) to recover the money owed. The court is not usually part of these proceedings. The receiver will recover enough money to pay:
This option does nothing for unsecured creditors and it cannot be used if the floating charge occurred after September 2003. As such, there are hardly any of these nowadays.
Liquidation or ‘winding up’ a company, essentially means closing it down. The assets are sold, and funds are given to creditors. Often, this will not cover the money owed to all creditors.
Both solvent and insolvent businesses can do this. If your company is solvent, the term given to this is a member’s voluntary liquidation, if it is insolvent it’s known as a creditors voluntary liquidation (CVL) or a compulsory liquidation.
All liquidations are followed by investigations into the company director’s conduct. If the investigation finds anything inappropriate, there can be severe consequences.
It’s not just the company that has to face consequences of business insolvency, as a director you might too.
If your actions have been unfit or unreasonable, or you have traded wrongfully or fraudulently, you may face these consequences:
It is extremely important, for both your professional and personal life, that you act quickly if you think your business is insolvent. Seek professional advice and find out about your options, so you can create a plan for dealing with business insolvency.
If you are concerned about business insolvency, speak to our experts today. They’ll be able to give you high-quality, actionable advice tailored to your situation.
What is a CVA? | Company Voluntary Arrangements Explained
A CVA or Company Voluntary Arrangement is a legally binding agreement with creditors allowing a proportion of debts to be paid back over time
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