What happens if I cannot pay my Company Voluntary Arrangement?
A company voluntary arrangement (CVA) can solve a company debt problem and transform a business back to profitability. However failure to maintain the agreed payments could force the company to be wound up.
Where a company is struggling under the weight of its debts, a company voluntary arrangement (CVA) can be a very good way of turning the business around.
Creditors agree to accept reduced payments over a fixed period of normally five years. At the end of the arrangement, any outstanding debt is written off and the business continues to trade.
The arrangement is acceptable to creditors because the return they are likely to get is greater than that which they would receive if the business was wound up.
A CVA can result in a company being able to write off over 50% of its debt. However, such an agreement must not be entered into lightly.
Risk of forced closure
If a company starts a CVA and then fails to maintain the agreed repayment plan, the ultimate remedy for the creditors is that it will be forced to stop trading and closed. It is therefore very important for directors not to agree to a CVA unless they believe that the required payments can be met.
Of course, despite the best efforts to forecast income and profits throughout the duration of a CVA, it is not easy to predict changes in trading conditions.
If revenues unexpectedly reduce meaning that agreed CVA payments cannot be maintained, it is possible to ask creditors to accept a variation to the agreement to reduce the payments required.
Very often creditors will agree to reducing payments still further if the alternative is no return at all. This is especially the case if there is an opportunity that payments will be increased again once trading improves.
However, if trading conditions become so bad that the company can no longer continue to make acceptable payments into its CVA, then it is likely that the creditors will agree that the company should be closed.
Is a Company Voluntary Arrangement the best route?
Because of the risk that a company will be wound up if its CVA fails, it is important for directors assess all of the alternatives before choosing this business rescue route.
One solution which should also be considered is pre pack administration. This involves setting up a new business which then buys the assets of the old and trades in its place without the burden of the legacy debt.
The major drawback of a pre pack solution compared to CVA is the upfront investment required to buy the old company assets. However, once completed there is no ongoing obligation to creditors and all available funds can be used at the directors discretion.
A company voluntary arrangement is an extremely good way of resolving a company debt problem. It can be implemented with little upfront investment and allows 50% or more of a company’s debt to be written off.
Nevertheless, before entering into this type of agreement with creditors, the directors must understand the potential risk of not being able to adhere to the agreement. If it fails because payments cannot be maintained, the business will face closure.