A CVA can be used used if a company is insolvent but the directors do not want to close it. The business must be viable and in a position to repay some of its debt.
- Can the Company pay something towards its debts?
- What if Directors have given Guarantees?
- Does a CVA stop a Winding Up Petition?
- Will Suppliers still work with the company?
When to use Company Voluntary Arrangement
Company Debt Expert James Falla talks about when a Company Voluntary Arrangement could be used. For more business debt advice visit www.companydebtadvice.net
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Can the Company pay something towards its debts?
Before considering a CVA (Company Voluntary Arrangement) you need to ask this question. If the burden of the unsecured debts was taken away could the company trade profitably and make a contribution towards what it owes?
If the answer is yes it might be an option. Before proposing the Arrangement a careful review of the company’s income and expenditure forecast must take place. You must be able show that debt repayments can be made and how much these will be.
A Company Voluntary Arrangement can be implemented on limited resources. A minimal upfront payment may be required to put together the necessary cash flow forecasts. However the majority of the fees charged are taken from the CVA payments.
For a CVA to be accepted the company does not have to be able to repay everything it owes. The creditors accept a percentage of the debt in full settlement.
What if Directors have given Guarantees?
A CVA is a formal insolvency procedure. Once it is in place any directors who have given personal guarantees against company debts must understand that they will become liable for these.
On a more positive note if the directors use this solution there no report on their behaviour. This is because the company is not being formally liquidated.
As such directors are shielded from accusation of wrongful trading. This could be useful if there is a question that they have knowingly allowed the business to trade inappropriately or when insolvent.
If Directors have given personal guarantees they should have a plan in place for how they will deal with the debts once a CVA is in place.
Does a CVA stop a Winding Up Petition?
A CVA can be used to protect the business from a Winding Up Petition. An Interim Order can be put in place which will put the winding up process on hold. If the creditors agree to the Arrangement the Petition will be overturned.
It is often HMRC who will petition for the winding up of a company. However if there is a possibility of agreeing a CVA which will provide a sensible return HMRC will often be supportive. Even if HMRC refuses the proposed Arrangement they will be legally bound to its terms if the majority of all creditors by value agree.
Will Suppliers still work with the Company if a CVA is used?
Suppliers who are creditors and so included in the CVA are likely to lose out. This is because they will not be repaid everything they are owed. However it does not automatically mean they will stop supplying the business.
It is often the case that suppliers will want to maintain a trading relationship with the company. They may require payment with cash up front from now on. However this will mean that they retain a client who is likely to then continue buying from them in the long term.
New suppliers may become aware that the company is in a CVA. This will certainly be the case if they carry out a credit check against the business. However this may not prevent them from striking up a trading relationship as long as suitable payment terms can be agreed. These may be cash on delivery.