When companies get into trouble we can often hear two frequently heard terms; Liquidation and CVA (Company Voluntary Arrangement) but what exactly are the differences between the two and what do they mean to the people concerned?
The biggest difference between the procedures is the ultimate aim. In the case of the CVA it is to allow what is essentially a profitable company to continue to trade and find its way through any difficulties, paying off its debts to creditors and thus returning to good standing and solvency.
With liquidation the aim is to stop the company trading and to ensure that no further debts are incurred, returning what value remains to creditors.
Liquidation is the act of closing down and selling off of the company assets. The company stops trading (and thereby incurring extra debts), the staff are laid off and all the assets are sold for the best price that can be obtained. In the case of an insolvent company it will be the final option but one that is taken to protect the interests of creditors.
Obviously this kind of ‘distress sale’ is likely to realise a lot less than the market value for the eventual creditors and once the liquidators fees are taken into account the eventual returns might be negligible. Clearly there is a decision to be made as it is often in the creditors best interest to push for a sensibly managed CVA so that they receive more money but over an extended period of time rather than aim to have the business wound up.
There are three types of liquidation; Compulsory Liquidation, where the company cannot pay its debts and is forced into liquidation by the creditors; Creditors Voluntary Liquidation (CVL) where the directors choose to close an insolvent company because there is no prospect of it paying off its debts; Members Voluntary Liquidation (MVL) where the company can pay its debts but chooses to close down, liquidate assets and pay creditors and shareholders what remains.
A CVA is a method of allowing the company to trade, providing some protection for its creditors but also ensuring that the debts can be managed in a structured way. This option is particularly suitable where the company is profitable but is just hampered by debts or onerous contracts. Administered by a licenced Insolvency Practitioner it allows the company to pay a proportion of its debts over a defined period of time.
A fundamental difference between a CVA and liquidation is the role of the directors. When a liquidator is appointed the directors cease to have control of the company however, whilst under a CVA the directors still run the business but are responsible for keeping up payments under the arrangement. This will clearly be a preferable option for directors who wish to remain in the business and want to keep the company alive, consequently quick action is necessary.
One of the main differences between A CVA and liquidation is who actually instigates the proceedings. A CVA can be applied for by the directors where all of the directors or members agree that this is the most suitable course of action (and assuming that the company complies with certain requirements). In the case of compulsory liquidation it is the creditors that can ask that the action is started that can ultimately ensure that company is stopped from trading and liquidated.
To gain a CVA the payment plan must be presented to creditors at a meeting and can only go forward if 75% (by debt value) agree. With voluntary liquidation 75% (by value of shares) of the shareholders must agree to the winding up of the firm.
In the case of a CVA there will be no investigation into the director’s conduct whereas with liquidation the Insolvency Practitioner may choose to examine the way the directors have acted and decide whether any further action is required.
In both cases any outstanding action to enforce debts ceases but of course with a CVA the company continues. This then gives the directors the chance to rescue the trading company with a better cash flow position and lack of debt collection procedures to cope with.
Once agreed the CVA gives the creditors clarity over what they will receive in payment for their debts and when they will receive it. In liquidation the creditors will get a dividend at some indeterminate time in the future once the work of the insolvency team has been completed.
As we can see there are some critical differences between Liquidation and CVAs. It’s important that directors take timely, qualified advice about their specific situation to avoid any chance of making the wrong decision. Getting good advice beforehand will provide you with a logical plan to move forward and get the best outcome possible.