CVA vs. Liquidation, what’s the difference?

The following article outlines the differences between a Company Voluntary Arrangement and Liquidation and the impact this makes on companies and creditors alike.

COMPANY VOLUNTARY ARRANGEMENT (CVA) VS LIQUIDATION – What’s the difference?

This article focuses on the difference between Company Voluntary Arrangement (CVA) and Liquidation procedures. As part of our online library of articles, we have written articles on a Company Voluntary Arrangement and the three types of liquidation – Creditors’ Voluntary Liquidation, Members’ Voluntary Liquidation and Compulsory Liquidation.

COMPANY VOLUNTARY ARRANGEMENT (CVA)VS LIQUIDATION – HOW DOES THE PROCESS WORK? 

Initially, the process is very similar. A director of a company will approach an insolvency practitioner for advice on their company’s financial affairs. If a director has concluded that they need an insolvency process, they may have already read articles provided by insolvency professionals to understand what the procedure entails. They may also have their own conclusion as to which process is their preferred solution. For example, there is a lot of information freely available on our website detailing the key considerations, such as this one. 

In the initial meeting, the insolvency practitioner (IP) always looks holistically at the company. Depending on the circumstances, the appropriate solution may be immediately apparent or may require a more detailed investigation of the company’s affairs. 

All IPs have a duty to provide best advice and will recommend which procedure(s) are best for the company and explain why other options have been ruled out. If you have concluded from your research that a Company Voluntary Arrangement is the most appropriate solution, it may well be the case. However, the IP will ensure there is no better option available to you that will deliver the same outcome. In any initial meeting, there will be an initial conversation which is a fact-finding exercise. Key documents the IP will need to see will be company accounts, cash-flow forecasts and significant contracts such as tenancy agreements. They will also need to understand your assets and liabilities. 

Once these documents have been reviewed and discussed, the IP will make their recommendation and if an insolvency process is recommended, the client may instruct the insolvency practitioner advising them. This is where the processes for Company Voluntary Arrangement and Creditors’ Voluntary Liquidation start to diverge, as different documents need to be prepared but ultimately this work is done by the IP and their staff. The main burden on the directors is to provide information. 

COMPANY VOLUNTARY ARRANGEMENT (CVA) VS LIQUIDATION – HOW MUCH PROTECTION DOES IT PROVIDE? 

A liquidation does not provide protection per se, but effectively freezes a company at a point in time, referred to as “crystalizing” the position. It is most commonly a terminal process and the IP will look to realise assets and distribute funds to creditors. Creditor claims are frozen in that they can only be met for money outstanding under the terms of the contracts together with any interest accrued to that point but future interest and charges can no longer be applied. There are a couple of exceptions to this general rule, but the IP will identify those with you as part of the process. 

A CVA is different in that it is a contract between the company and its creditors. It requires the approval of 75% of the company’s creditors and if any creditors are connected, such as an outstanding director’s loan account, there will be a second round of voting where in excess of 50% of creditors need to agree to the CVA. 

Assuming the CVA is agreed upon, all creditors will be bound by its terms. The vast majority of outstanding claims, current at the date of approval, will be frozen as of that date. Creditors may agree that certain other creditors are paid, if they are business critical, such as where the company requires a supplier and an alternative supplier doesn’t exist. 

A CVA is not a terminal process and the directors only have to sell assets they have agreed to dispose of within the CVA proposal. If the assets are required to trade the business, then it’s likely they will not be sold as the company cannot trade without them. An example of this would be that if the company in question was a van-hire company, with a fleet of 50 vans, but was only achieving bookings for 30 vans, the company may propose to sell the unused vans as a cash injection. 

The company will still need to pay future liabilities such as VAT, as it falls due, but historic liabilities will be paid from the CVA fund in accordance with its terms. 

The most common form of payment is that the company contributes to the CVA pot. This is usually lower than if all creditors were paid monthly. In addition, the directors remain in control of the company, and the insolvency practitioner’s role is to supervise the arrangement to ensure both sides comply with the terms agreed. 

If a CVA is approved, all creditors are bound by its terms, even if there are objections from certain creditors to the terms of the CVA. 

WHAT’S THE DIFFERENCE BETWEEN A CREDITORS VOLUNTARY LIQUIDATION AND A COMPANY VOLUNTARY ARRANGEMENT?

Ultimately a Company Voluntary Liquidation (CVL) is a terminal procedure where a company cannot continue to trade. Whilst the directors may be able to set up a successor business working with the same clients and in the same sector, this has to be done correctly and the IP will provide guidance in this regard. 

A Creditors Voluntary Arrangement (CVA) is a rescue procedure where the company remains under the director’s control and continues to operate as it did previously, although there will be efficiencies and cost-savings to make the CVA viable. Assuming the CVA is successfully completed, the business will continue to operate. 

WHAT IS A COMPULSORY LIQUIDATION?

As we have mentioned above in this article, we have a comprehensive library of insolvency terms and procedures and you can find out more about Compulsory Liquidation here.

WHAT IS A MEMBERS’ VOLUNTARY LIQUIDATION? 

From the same library of articles, we have previously produced a complete guide to Members’ Voluntary Liquidation here.

COMPANY VOLUNTARY ARRANGEMENT VS LIQUIDATION – Which is right for you? 

The best way to establish which process is right for you is to speak to an insolvency practitioner. These are highly experienced professionals who can provide the correct information to ensure you are taking the correct procedure. 

We have prepared an article covering the role and duties of an insolvency practitioner here.

However, as in general guidance, the following points would indicate that a CVA may be a better process than a liquidation, given that liquidation is a terminal process.

• If the company has good clients that pay promptly
• If the cause of the financial distress is linked to a one-off event – such as the failure to pay by the main client or an event that can’t be foreseen – such as the Covid pandemic. 
• If the company would be able to make a substantial repayment to its creditors 
• If a binding and structured repayment plan could be entered into
• If a restructuring and reorganisation of the company’s operations and resourcing can improve profitability. 

If some or all of the above apply, then a CVA may be more suitable than a liquidation. 

If you are experiencing financial difficulty, you can be supported through this difficult process by experts who understand the pressures you are facing and have experience in working swiftly to deliver a strategy to resolve the issues you face. This is undertaken by seeking prompt advice from an Insolvency Practitioner 

Chamberlain & co offers a free initial one-hour consultation which is discrete and can be held via telephone, face-to-face meeting, or through a digital medium such as Microsoft Teams. All matters are discussed confidentially, and the team is used to making discrete enquiries on a no-name basis when working with you to produce a strategy to resolve your issues. 

As with all insolvency practitioners, Chamberlain & Co are committed to delivering best advice in all scenarios, and the team’s work has been recognised regularly at the Yorkshire Accountancy Awards and Turnaround, Rescue and Insolvency Awards. 

You can contact us by calling 0113 242 0808; or by emailing us at advice@chamberlain-co.co.uk or by completing our online contact form here.