How can I reduce my company debt with a Company Voluntary Arrangement?

How can I reduce my company debt with a Company Voluntary Arrangement?

If your business is unable to pay its debts, a company voluntary arrangement (CVA) could reduce your monthly payments and write off debt thus saving the business from failure.

A company voluntary arrangement (CVA) is often used to solve limited company debt problems.

Once a CVA is in place, all creditor payments are consolidated into a single affordable monthly amount. The amount paid each month is based on what the company can afford after allowing for running costs.

The business is given an immediate advantage as cash is freed to allow trading to continue without constant debt collection activities from creditors and the threat of winding up.

Payments into a CVA normally continue for 5 years. After this time, any outstanding debt is written off. The company is then left completely debt free and in a position where it can continue to invest and grow.

CVA gives a better return for creditors

Creditors will agree to a CVA thus reducing the payments they receive and ultimately writing off debt because they know that the return they are getting is better than if the company was closed.

If the business is liquidated, its assets are sold and employees made redundant. In general, the return received by creditors in these circumstances is minimal. A CVA allows the company to continue to trade and maximise the possibility of generating cash. As such, the return creditors get will be far greater by allowing a CVA.

There are also benefits of using a CVA for the company directors. No significant investment is required to implement a CVA as any fees are taken from the normal monthly payments the company makes.

Because the business is not closed, the directors are not subject to a liquidator’s investigation into whether they should be accused of allowing the business to trade while insolvent. If this was the case, the directors could become personal liable for the company debt.

Credit rating effected by CVA

The implementation of a company voluntary arrangement does have certain implications which need to be understood.

The first is that the company’s credit rating is affected. While the business is in a CVA, it will not generally be able to borrow further money from a bank. This situation could reduce the businesses ability to invest and grow while a CVA is in place.

The company directors must also be very careful t ensure that the terms of the CVA are maintained. If payments are repeatedly missed, then the agreement is at risk of failure and the company may then face being wound up.

Despite these drawbacks, a company voluntary arrangement is an extremely effective way of solving a company debt problem and if implemented, can lead to the debt reduction and write off.