A company voluntary arrangement (CVA) is an insolvency solution for companies who are struggling financially but could be viable if they had the chance to trade out of debt.
There are plenty of benefits to CVAs: for starters, interest and charges on debt are frozen, creditor action is halted, and repayments are consolidated into a single affordable payment each month.
However, for a CVA to be approved, it needs to be supported by 75% of the creditors by value and more than 50% of the shareholders. But not all CVAs are approved – so, what happens if a CVA is rejected? To find out why your CVA could be rejected and for advice on your next steps, read on…
Why might a CVA be rejected?
The main reason that a CVA could be rejected is that the company just isn’t seen to be viable and the forecasts in the CVA proposal are unachievable.
It could be that the CVA proposal is poorly drafted, or other possible reasons include that the company has been poorly managed and the creditors don’t believe this is likely to change.
The directors could also have taken too much money out of the company in the past, resulting in the creditors feeling they have been poorly treated, or the creditors could even want an investigation into the directors’ conduct.
Finally, if HMRC is one of your creditors, they will only support a CVA if the company has previously been fully compliant – so if your returns and filings have been late in the past, you could find yourself running into issues.
So, what happens if a CVA is rejected?
If your CVA is rejected due to any of the reasons above, it’s important not to panic. The rejection of a CVA proposal doesn’t automatically mean the business will cease to be.
First things first, many of these objections can actually be worked on in advance, and the fact of the matter is that if you work with a licensed insolvency practitioner, they are very unlikely to put forward a CVA proposal that is likely to be rejected.
In order for your CVA to be approved, your creditors need to be satisfied that there are going to be big changes made in the company and that the projections and forecasts are realistic.
However, the fact of the matter is that sometimes creditors will simply believe that they can get a higher return from another insolvency procedure, in which case you will need to look at alternative options to save the company.
Alternative solutions to consider if your CVA is rejected
If your CVA is rejected, there are other options to consider depending on the individual circumstances of your business:
1. Administration
Entering administration enables you to protect your company from creditor action, but there is a time limit of eight weeks in which to formulate a plan to rescue or restructure the business.
During this time, an insolvency practitioner will take charge of the company who will either rescue the company or sell off company assets in order to repay creditors.
If the company is viable and has relatively predictable cash flow, it could even sell the business. However, there are strict regulations to consider.
2. Pre-Pack Administration
With a pre-pack administration, the business is marketed, and a sale is arranged before an administrator is appointed. In many cases, the assets are sold to existing management who can then set up a new company without debt.
Again, there are a number of rules and regulations to consider, and it needs to be established beyond doubt that a pre-pack would provide the best outcome for the creditors in order for it to be approved.
3. Creditors’ Voluntary Liquidation
If the creditors refused the terms of the CVA, voluntary liquidation might be the only way to keep everyone happy and avoid compulsory winding up. As the name suggests, a creditors’ voluntary liquidation places the interests of the creditors at the fore.
With a CVL, business assets will be liquidated, and the company will be closed down. However, providing the directors have acted responsibly they are less likely to be accused of misconduct.
What about if I fail to keep up with the CVA?
Another scenario is that your CVA is approved but that you run into difficulty keeping up with the repayments further down the line.
Failure to make the agreed monthly payments will constitute a breach of the CVA terms, which could have huge consequences for the future of your company and land you in severe hot water.
As ever, prevention is better than cure – so if at any point during your CVA you think you might struggle to make upcoming payments, it’s absolutely essential that you notify your insolvency practitioner as soon as possible.
It could be that the terms of the CVA might be able to be revised, enabling you to pay lower monthly payments or extending the duration of the agreement. However, this needs creditor approval – and it is rejected, your CVA will most likely be terminated.
How McAlister & Co can help
In conclusion, in order for your CVA proposal to be approved, it needs to be fair and feasible – and the good news is that a well-drafted CVA will most likely have a good chance of being approved.
McAlister & Co are experts in business rescue and turnaround procedures and can help you to draft a CVA proposal or explore other options to rescue your business.
So, if you are facing financial difficulty and need professional advice or have had a CVA refused and are unsure about what happens if a CVA is rejected and what your next steps should be, contact us today for FREE confidential advice.
