A CVA will affect the directors of the company. Normally none will have to resign. However management changes may be desirable. They may also have personal liability for debts.
- Directors likely to continue running the company
- No investigation into Directors conduct
- Payment of outstanding Directors Loan Accounts
- What happens to Directors personal guarantees?
Company Voluntary Arrangement and Directors
Company Debt Expert James Falla explains the affects of a Company Voluntary Arrangement (CVA) on the company directors. For more company debt advice visit www.companydebtadvice.net
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Directors are likely to continue running the company during a CVA
After a CVA (Company Voluntary Arrangement) starts the directors are not legally obliged to make changes to the board. If you are the sole company director you can continue to run the company.
In some instances the creditors may want to see an introduction of new management. Without such a change they may be less inclined to accept the Arrangement. This would be primarily to ensure their interest is protected. However such demands are quite rare.
Nevertheless introducing new members of management is often desirable. New people can bring new ideas or methods or working. This can help the company move forward. It may also help stop you from making the same mistakes as were made in the past.
Directors may have to reduce the amount they are paid in order to ensure that the CVA is agreed. However a reasonable amount for their remuneration should still be allowed.
Director’s conduct is not investigated in a CVA
If the directors choose to start a Company Voluntary Arrangement their past conduct is not investigated. This is because the company is not being closed. A liquidator is not appointed and the business continues to trade in the same form.
This is a considerable advantage if the directors have allowed the company to trade while insolvent. There is no requirement to report such activities to the Insolvency Service. As a result the directors are protected from possible disqualification.
If the CVA fails this will normally result in the liquidation of the company. A review of the director’s conduct will then be undertaken.
Payment of Directors Loan Accounts during a CVA
It is not possible to for a director to drawn cash from the company as a dividend payment if it is not profitable. If this has happened the money drawn is shown in the accounts as a director’s loan account. This is also known as an overdrawn directors current account. In affect this is a debt owed to the company by the director.
If the company was closed the director would then be liable to repay the debt owed to the liquidator. However if the company starts a CVA the debt does not have to be repaid.
It is sensible for directors to pay off loan accounts during the CVA. This can be achieved by offsetting the debt against wage payments. However they do not have to do this. They can leave it and repay it after the CVA is completed by offsetting against future dividends.
What happens to Directors Personal Guarantees in a CVA?
A CVA is a formal insolvency procedure. Once the Arrangement is in place any creditors protected by personal guarantees can call on these. In other words action can be started to recover the outstanding debt against any director who has given a personal guarantee.
It may be possible to agree with the creditors not to pursue individual guarantors personally until the CVA is completed. Only at this time can the exact amount of any debt shortfall be established.
Alternatively with bank guarantees it might then be possible to turn any shortfall into a personal loan. The director could then pay this over a sensible period of time rather than having to pay the outstanding balance in full.
How personal guarantees will be managed must be considered before proposing a CVA. A director may be able to use a personal debt management solution to deal with this issue.