A company voluntary arrangement (CVA) can solve a company debt problem and move the business to profitability. However failure to maintain agreed payments may result in forced closure.
- What happens if a CVA is not paid?
- Options if a company cannot pay its CVA
- Is a CVA the best company debt solution?
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What happens if CVA payments are not maintained?
A company should only start a Company Voluntary Arrangement (CVA) if it believes it can maintain the agreed payments. However it may not always be possible to do. This will be the case if circumstances change for the worse. Alternatively the commitments originally given may simply have been too ambitious.
The problem is that if agreed CVA payments are not met the Arrangement could then fail. The ultimate remedy for the creditors would then be to force the company to close.
It is therefore important that directors only start a CVA if they believe that the agreement can be maintained. Having said that despite the best efforts to forecast income and profits changes in trading conditions can make this difficult to achieve.
Options if a Company cannot pay its CVA
It is possible that revenues unexpectedly reduce or costs increase. In these circumstances it is likely that the company will not be able to maintain its agreed payments. It is important to speak to the Insolvency Practitioner (IP) as soon these issues are identified.
The business may still be able to make payments into the Arrangement albeit at a reduced rate. If so it is possible for the IP to ask creditors for help. A variation of the agreement can then be agreed to reduce the payment amounts. This may include an extension of the Arrangement to compensate for the reduction.
Creditors will normally agree to reducing CVA payments if the alternative is liquidation and no return at all. This is especially the case if payments may be increased again once trading improves.
If trading conditions become so bad that the company can no longer make any acceptable payments the agreement will fail. The creditors may then demand its closure. This often happens if HMRC are a major creditor. If the company is not forced to close the directors can decide the best course of action. This may be to implement a Pre Pack Liquidation.
Is a CVA the best company solution?
Because of the risk of failure subsequent implications a CVA must only be used in the right circumstances. If the trading outlook is uncertain or likely to deteriorate then it may be the wrong solution. In these circumstances directors of small or medium sized companies should investigate Pre Pack Liquidation as an alternative.
A Pre Pack involves setting up a new business which then buys the assets of the old and trades in its place. The significant advantage of the solution is that the new company trades without having to repay the legacy debt.
However the drawbacks of a Pre Pack also have to be considered. It is likely that more investment will be required up front than a CVA. The directors will also have to consider their personal liabilities. They will be required to repay any outstanding Loan Accounts. A report on their conduct will also be submitted to the Insolvency Service.