Many people have heard the terms CVA and Liquidation but not know exactly what the difference is. Most of the time this is fine but for a businesses that are facing difficulties it is important to be clear as to what people mean when they are discussing these.
In this article we’ll examine the two processes and explain what the key differences are between them
A Creditors Voluntary Arrangement or ‘CVA’ is a method of returning some value to a company’s creditors.
When a company closes down, unfortunately it often means that the people and businesses it owes money to lose out quite badly. A 01is a method of allowing the company to continue to trade and then pay off at least some of its debts as it goes along.
The idea is pretty simple, the creditors allow the company time to pay but have a legally enforceable debt payment schedule that the business must adhere to.
In general terms the original directors and managers still run the company, but they will be required to produce a full and complete business plan that must be realistic and achievable, and they must stick to the plan.
The business will have a payment plan that requires them to make regular payments to the administrator of the CVA that will then be distributed to the creditors. Whilst it’s true that they won’t get all of the money owned and indeed they will have to wait an amount of time, the fact is that overall the outcome will be better for the creditor, the company and its staff and customers than simply closing the firm down.
If the company has been particularly badly managed in the past then the creditors may require some changes to be made to either the management or directors of the company. They may require a new Financial Director to be put in place to safeguard their interests or may want a new CEO but overall the company will continue to trade fairly normally.
At the end of the arrangement, providing that all f the payment s have been made, the company will exit its CVA and continue on its way, hopefully in a better state than it was before.
Liquidation is an entirely different matter.
A business that has no reasonable way of trading out of its difficulties needs to be wound up in an orderly way and any value realised returned to the creditors.
Whilst it may seem harsh the grim reality is that many business owners simply fail to face facts soon enough and continue to rack up debts. The administration and liquidation process takes control out of the errant directors’ hands and ensures that little or no debt is consequently incurred.
As a first step a company will often enter into administration. This is where a licensed insolvency practitioner takes control of the business and makes an assessment as to whether the firm has a future or not.
They’ll be looking at the suitability of other options such as a trade sale or CVA but if none of these are likely to succeed then they will want to close the operations of the business as soon as possible to avoid adding more costs on to the already large debts.
The liquidation process then is about stopping the activity of the firm and selling off any assets for whatever value is realisable and then returning any surplus to the creditors.
Sadly of course this also means that existing staff will lose their jobs almost immediately.
The end point for the two processes couldn’t be more different.
With a CVA the aim is to return a healthy company to trading normally as soon as possible. This doesn’t always happen of course but at least the business has a chance.
In contrast, with liquidation the end point is the eventual dissolution of the company and its striking off the company register at Companies House. As such the firm then ceases to exist although it’s possible that the administrator may have been able to sell any brands off during the liquidation process.
As we can see there are very clear differences between Administration and Liquidation. In the former case the company continues, pays down its debts and moves on, usually with the directors in place.
In the case of liquidation we can see that this is the most drastic of action and only really desirable where there is no other option. Sadly it means the end of the company and also that creditors will usually lose most of the value of their debts so isn’t to be embarked upon lightly.
Clearly liquidation is a very drastic option and is the choice of last resort. If a business is truly unsalvageable then a quick liquidation could well be the only viable alternative in order to protect creditors and the public alike.