A Company Voluntary Arrangement (CVA) is a business rescue tool that can be used to help struggling companies manage their debt. It involves the company making an agreement with its creditors to pay back its liabilities over a specified period of time, enabling the company to meet a more realistic repayment plan. In order for a CVA to go ahead it must have the approval of at least 75% of creditors. In other words, the agreement needs to be supported by the vast majority of creditors, so what happens if a CVA is rejected?
If the CVA proposal is rejected then the business will need to decide whether they are able to repay the debts without the help of a company voluntary arrangement, or if they need to enter formal insolvency proceedings. As company voluntary arrangements are considered by businesses that are already struggling, in the majority of cases the best step will be liquidation or administration. We’ll look more closely at these options for what happens when a CVA is rejected in just a moment, but first it’s important to understand why the proposal would be rejected in the first place.
Why Would A CVA Be Rejected?
In order for creditors to agree to a re-negotiated payment plan, they need to be confident in the fact that the business will definitely meet the proposed repayment schedule. If they feel that the company is not viable, for example has been managed poorly in the past, then they may not feel that the forecasted repayment plan is achievable. With regards to HMRC, they will only support a company voluntary arrangement if the business has been compliant in the past with filing tax returns etc.
In addition to this, if the CVA proposal is drafted poorly then this reduces confidence in the process. That’s why it’s essential to instruct a trusted insolvency practitioner to direct the drafting of the proposal. Our reputable team of insolvency professionals at Ballard Business Recovery have varied experience in administering both company rescue strategies as well as formal insolvency procedures.
Options If A CVA Is Rejected
So, going back to our earlier question of what happens if a CVA is rejected, the company will need to look at alternative processes to save or close the company, that may include the following:
Administration
This process provides the business with a moratorium which prevents any further legal action being taken against them during the period of administration. An administrator will take over the company with the aim of returning as much money to creditors as possible. Assets might be sold to pay off debts so that the business can continue to trade on a going concern basis.
Pre-Pack Administration
Alternatively, the administrator may facilitate the immediate sale of the business and its assets on a going concern basis. In a pre-pack administration, the sale of the business is pre-arranged before the administrator is appointed. The benefit of this is that it ensures business continuity, maximising its potential value.
Creditors Voluntary Liquidation (CVL)
As we mentioned earlier on, closure of the company is likely to be the most common consequence of what happens if a CVA is rejected. When a business is unable to repay its creditors, a CVL enables the company’s assets to be liquidated in order to raise funds with which to repay creditors. If a CVA is rejected, it’s crucial to be proactive in voluntarily liquidating the company, rather than risking a creditor issuing a Winding Up Petition to recover their outstanding debts.
If you have any further questions regarding what happens if a CVA is rejected please don’t hesitate to get in touch with our experienced team of business rescue experts and insolvency professionals at Ballard Business Recovery. Whether you require assistance with a CVA, or would like to hear about alternative company rescue procedures, or the option of liquidation, we’re here to help.
