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What are the effects of a Company Voluntary Arrangement?
Implications for the company
If a company voluntary arrangement is implemented, the business will remain intact and continue to trade normally.
Any legal actions currently being taken against the company such as county court judgements or winding up petitions will be stopped. Creditors are not allowed to start new actions once the CVA is in place.
Once the CVA is completed, any outstanding debt will be written off and the company will be left to continue to trade as normal.
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Implications for Directors
After a Company Voluntary Arrangement is implemented, the directors will normally remain in their positions.
There is no reason for directors to resign or leave the business if they do not want to. However, the current directors might take the opportunity to introduce a new member of the management team who can bring new ideas to the business to help secure its future. The company’s creditors may request this as a condition of accepting the CVA.
A CVA does not result in the company being liquidated. As such, there is no liquidator appointed and no investigation into the conduct of the directors. This is particularly important if the directors feel that they may otherwise be accused of wrongful trading.
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Implications for Employees
Because under a company voluntary arrangement the company trades normally, employees are generally not affected. They will continue to work at their jobs largely without disruption.
However, in order to trade profitably in the future, the company may need to consider restructuring some of its departments or processes. As a result the business might decide that some employees are no longer required.
If this is the case, employees must be made redundant using normal redundancy procedures and compensated with redundancy pay where this is warranted.
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Implications for Creditors
In agreeing to a company voluntary arrangement, the company’s creditors are accepting that they will receive less than they are owed. Very often the return to creditors in a CVA is less than 50% of their total outstanding debt.
However, the return creditors receive in a CVA must be compared to what they would get if the business was liquidated. Generally if a business is closed, creditors will get little or no return.
The return creditors receive in a pre pack administration which is likely to be more than in liquidation will still normally be less than in a CVA. As such, a CVA is a far better solution for creditors. To put it simply, half a loaf is better than no bread.
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