What happens if the CVA fails?

Question

What happens if certain terms and conditions in the agreement get rejected? What's the next step for a company?

Answer 1

A CVA is an option worth considering if you believe that your company has a high chance of being profitable and that you can make the required monthly payments to settle the debt. To push through with a CVA, a proposal needs to be submitted to your company's creditors and shareholders. These two groups of people will convene and decide whether they approve or disapprove of the proposal. At least 50% of shareholders (by the value of shares) should vote in favour of the agreement, while 75% (by the weight of debt) should vote to accept the terms stated in the proposal.

Having an insolvency practitioner can be of great help as you navigate drafting an agreement and negotiating with your company's creditors and shareholders. Your insolvency practitioner can also help you look into other solutions if either creditors or shareholders vote against the agreement. You have plenty of options to consider if a CVA doesn't push through. Get in touch with your insolvency practitioners in Glasgow to know more about these alternative insolvency options.

Answer 2

When a CVA (Company Voluntary Arrangement) is proposed and subsequently fails or is rejected, it's essential to understand the implications and what may follow. A CVA is a formal insolvency procedure in the UK that allows a financially distressed company to come to an agreement with its creditors to repay its debts over a specified period, often at a reduced amount or with revised terms. However, CVAs are not always successful, and several outcomes can occur if one fails or is not accepted by creditors:

1. Administration or Liquidation: If a CVA is rejected, the company could be placed into administration or, in more severe cases, face compulsory liquidation. Administration involves an appointed administrator taking control of the company to try and save it as a going concern. Liquidation, on the other hand, means selling the company's assets to repay creditors, effectively closing the business.

2. Legal Proceedings: Creditors who opposed the CVA may pursue legal action against the company to recover their debts. This can lead to court judgments, and in some cases, assets may be seized to satisfy these judgments.

3. Financial Instability: A failed CVA can leave the company in a precarious financial position. It may struggle to meet its immediate financial obligations, leading to a worsening financial situation.

4. Director's Liability: Directors should be cautious when proposing a CVA. If it fails, they could potentially be held personally liable for some of the company's debts if their actions are found to be wrongful or negligent.

5. Credit Rating: A failed CVA can have a lasting impact on the company's credit rating. This can make it challenging to secure credit or financing in the future.

6. Employee Redundancies: In some cases, if a CVA is unsuccessful, the company may have to make staff redundant as part of cost-cutting measures or in preparation for liquidation.

7. Reconsideration and Adjustments: If the initial CVA proposal is rejected, the company may have the option to revise the proposal and seek creditor approval again. Adjustments to the terms or improved communication with creditors might lead to a successful CVA.

8. Seeking Alternative Solutions: A failed CVA doesn't necessarily mean the end of the road. The company and its advisors may explore alternative solutions, such as a pre-pack administration, refinancing, or negotiation with creditors outside of formal insolvency procedures.

9. Dissolution:  In cases where the company has no assets or prospects of recovery, it may be voluntarily dissolved, effectively ceasing to exist as a legal entity.

In summary, the outcome of a failed or rejected CVA can vary depending on the circumstances of the company and its financial situation. It's crucial for company directors to seek professional advice early in the process and carefully consider the potential consequences and alternative options available to address their financial difficulties.