Avoid Company Bankruptcy (Liquidation) using Company Voluntary Arrangement (CVA)
If your company is suffering from financial difficulties and is struggling to pay its creditors you may be thinking about cutting your losses and closing the company down. This process is commonly known as company bankruptcy. The formal term is actually company liquidation. If a company is liquidated, the company’s trading is stopped and its assets are sold and turned into cash or “liquidated”.
Before deciding to liquidate your company, it is worth considering whether there may be a possibility of saving the business. If you believe your business has a future but is just being dragged down by the weight of its creditors, one option you can consider is a Company Voluntary Arrangement (CVA).
A company voluntary arrangement is a formal legal agreement with the company’s creditors to settle the business’s debt.
The creditors agree to accept reduced payments based on what the business can afford paid over a fixed period, normally between 2-5 years. Once the agreed number of payments has been made, the creditors agree to write off any outstanding debt and the business is free to continue trading debt free.
There are a number of advantages for a business if it decides to undertake a company voluntary arrangement.
Clearly a significant advantage is that company debt is written off. However, as importantly, the CVA protects the business from further legal action by its creditors. This gives the company a breathing space so that business processes can be changed and the company can move forward once the arrangement has ended. The company itself remains intact therefore protecting key teams and staff. A CVA will also allow the company directors to avoid an investigation of wrongful trading which would occur if the business was liquidated.
Saving a company from liquidation using a company voluntary arrangement also has advantages for creditors. Ultimately, the business remains and if properly managed, can continue to trade with historical suppliers into the future. As such, business relationships which may be important for both the business and its suppliers can be maintained.
Of course, there are some risks to the success of a company voluntary arrangement. Typically, the management team in the business stay the same and therefore unpalatable changes such as cost cutting which may be essential to the future of the business are not undertaken. If this is the case, then using a CVA may be simply putting off the day when the company is bankrupt and has to be liquidated. However, if the company directors and owners feel that the business has a future and they are prepared to undertake radical changes which will almost certainly be needed, than a company voluntary arrangement is an excellent way to avoid liquidation and preserve the business for the future.