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CVA Rejected?


What happens when a CVA is rejected?

A Company Voluntary Arrangement (CVA) functions as a formal payment plan entered into by a company and its outstanding creditors. Typically running over a set period of between three and five years, the company will agree to make monthly repayments towards its debt with the agreement of creditors. Depending on how much the company can afford to repay, and the level of liabilities involved, a portion of this debt may also be written off.

While a CVA can be an extremely useful and valuable process, giving a company the opportunity to continue trading while reducing its debts in a sustainable manner, it is not an option which is suitable for every business experiencing financial distress.

CVAs are designed as a restructuring option for viable companies who can demonstrate a realistic chance of turning around their fortunes. This is because a CVA works on the basis that a company will use future profits with which to repay its existing debts. In order for a proposed CVA to become legally binding, a minimum of 75% (by value) of voting creditors must give their consent.

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Why would my CVA be rejected?

When drawing up a CVA proposal, your appointed insolvency practitioner will carefully assess your company’s financial position including its assets, liabilities, cash flow, and future trading predictions. Using this information, they will put together a CVA proposal and present this to your company’s creditors.

There are two main reasons CVA proposals are rejected. In many cases this is because the repayment amount offered is simply not enough to satisfy creditors, while other proposals are rejected due to creditors not having confidence in the company’s long-term viability and therefore doubt whether the company will be able to adhere to the scheduled repayments for the duration of the CVA.

Therefore, if the company cannot adequately demonstrate its likelihood of returning to profitability, it is likely that the creditors will reject the CVA proposal outright. Alternatively, creditors may believe they can increase their returns by forcing your company to enter into an alternative insolvency arrangement such as administration or liquidation instead.

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What can you do if your CVA is rejected?

If your CVA is rejected, it may be possible to enter into negotiations with creditors and amend the terms of the arrangement. However, this relies not only on creditors being open to considering a revised proposal, but also on the company’s ability to offer more favourable terms which will be agreeable. In many cases, the company will simply not be able to afford to do this.

In this instance, you have a difficult decision to make as the director of a financially distressed company. If you are not able to meet the demands of your creditors by settling your liabilities, you may need to consider whether the company has a future. If its debts are greater than its assets, and the company is unable to meet its outgoings as and when they fall due, all signs point towards insolvency, and it may be the case that the company needs to be liquidated.

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CVL after a rejected CVA

As director, you can initiate this through a Creditors’ Voluntary Liquidation – or CVL – which is a formal liquidation process which brings about the end of an insolvent company. As with a CVA, a CVL can only be entered into under the guidance of a licensed insolvency practitioner who will oversee the whole process. Their role will be to identify company assets and realise these for the benefit of creditors. Once this is done the company will be wound down and dissolved; it will then cease to exist as a legal entity and all remaining debts (except those which have been personally guaranteed) will be written off.

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Further information

If your business is undergoing a period of financial difficulty, whether this is down to pressures caused by Covid-19, escalating supplier debts, HMRC arrears, or a sudden drop in trade, it’s important that professional advice is sought as a matter of urgency. If you believe the problems are temporary and that the long-term prospects for your company are good, a fast-track CVA could be the perfect solution to your current problems.

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