Chris is an Insolvency Practitioner regulated by the ICAEW since 2014,.
He is experienced in contentious insolvency with excellent analytical skills and strong knowledge of both general and technical insolvency matters.
Facing the potential failure of a Company Voluntary Arrangement (CVA) can be a stressful and uncertain time for any director.
Despite best efforts, a CVA might fail due to unforeseen circumstances or changes in the business environment.
It’s crucial to understand that you’re not alone, and there are practical steps to navigate this challenging situation.
By understanding the implications of a failed CVA and exploring available options, you can make informed decisions to protect your business and personal interests.
A Company Voluntary Arrangement (CVA) is a formal insolvency procedure that allows an insolvent limited company to repay its creditors over a specified period while continuing its operations.
This legally binding agreement, introduced by the Insolvency Act 1986, is crafted by a licensed insolvency practitioner and requires approval from at least 75% of voting creditors by debt value. The primary aim of a CVA is to provide a flexible, cost-effective solution to financial distress, enabling the company to avoid more severe insolvency measures like administration or liquidation.
However, a CVA can fail for several reasons. Missed payments are a common cause, as failing to adhere to the agreed payment schedule breaches the terms of the arrangement. Additionally, changing business conditions, such as an unexpected downturn in market demand or rising operational costs, can strain the company’s ability to meet its obligations.
Lastly, if creditors withdraw their support or if there is insufficient ongoing communication and trust between the company and its creditors, the CVA may collapse. Non-compliance with the terms or a sudden financial downturn can thus jeopardise the arrangement, leading to its failure.
Immediate Consequences of a Failed CVA
When a Company Voluntary Arrangement (CVA) fails, the immediate loss of creditor protection can lead to significant repercussions. Creditors regain their rights to pursue outstanding debts, which means you may face increased pressure and potential legal actions. This shift can result in winding-up petitions, where creditors seek to liquidate your company to recover their dues. Additionally, repossession actions might occur if assets were used as security.
Practically, the failure of a CVA often leads to a rapid escalation in creditor demands. You may experience:
Winding-Up Petitions: Creditors can apply for compulsory liquidation, aiming to dissolve your company and distribute its assets.
Repossession Actions: If any assets were secured against debts, creditors might move quickly to reclaim them.
Legal Proceedings: Expect potential court actions as creditors seek judgments to enforce debt recovery.
These consequences highlight the urgency of addressing creditor demands promptly. It’s crucial to engage with professional advisers who can help navigate these challenges and explore alternative solutions, such as administration or liquidation, to manage the situation effectively.
Director Responsibilities and Potential Liabilities
When a Company Voluntary Arrangement (CVA) fails, directors face significant responsibilities and potential liabilities under UK law. One of the primary risks is wrongful trading, where directors may be held personally liable if they continue to trade while knowing there is no reasonable prospect of avoiding insolvent liquidation. This could lead to personal financial exposure if it is determined that they failed to minimise potential losses to creditors.
Directors also need to be mindful of any personal guarantees they have provided. These guarantees can become enforceable upon CVA failure, putting personal assets at risk. Additionally, directors have fiduciary duties to act in the best interests of the company and its creditors. Breaching these duties could result in personal liability or even disqualification from acting as a director.
Key obligations include:
Avoiding wrongful trading by ceasing operations if insolvency is unavoidable.
Reviewing any personal guarantees and understanding their implications.
Acting in the best interests of creditors to minimise losses.
Given these complexities, seeking professional advice is crucial. Clear guidance exists to help directors navigate these challenges and protect themselves legally and financially.
Next Steps and Alternative Solutions
When a Company Voluntary Arrangement (CVA) fails, it’s crucial to act swiftly and strategically. First, assess whether negotiating an alternative arrangement with creditors is feasible. Open communication is key: reach out to creditors promptly to discuss potential revised terms, such as extending payment schedules or adjusting repayment amounts. Any new agreement must comply with your legal duties as a director.
If renegotiation isn’t viable, consider formal insolvency procedures. Administration can be a suitable option if the goal is to rescue the company or achieve a better outcome for creditors than liquidation. In administration, an appointed administrator takes control, aiming to restructure the company or sell its assets in an orderly manner.
Alternatively, if the company’s financial situation is beyond recovery, liquidation might be necessary. This process involves winding up the company and distributing its assets to creditors according to statutory priorities. It’s a more definitive end but can sometimes be the most practical solution.
Throughout this process, consulting with an insolvency practitioner is advisable. They can provide expert guidance tailored to your specific circumstances and ensure compliance with all legal requirements. Engaging with professionals early can help you navigate these challenging waters more effectively and minimise potential liabilities.
Expert Advice
If you need help understanding the best way forward for your company, don’t hesitate to reach out. Use our live chat during working hours for immediate assistance, or call us on 0800 074 6757 for a confidential discussion about your options.
We can help you navigate the complexities of your position and ensure you’re taking appropriate action to protect yourself during this challenging time.
FAQs
Can a failed CVA be reinstated or renegotiated?
Once a CVA fails, reinstatement is not typically an option. However, renegotiation might be possible if creditors are willing to consider a new proposal. This would require the involvement of a licensed insolvency practitioner to draft a revised arrangement that addresses the reasons for the initial failure. It’s crucial to act swiftly and communicate openly with creditors to explore this possibility.
Does failing a CVA automatically force liquidation?
Failure of a CVA does not automatically lead to liquidation, but it does expose the company to increased creditor actions, including winding-up petitions. Creditors may choose to pursue liquidation if they believe it is the best way to recover their debts. Directors should seek professional advice promptly to explore alternative insolvency procedures like administration.
How quickly can creditors act once the CVA fails?
Creditors can act immediately once a CVA fails. The legal protections afforded by the CVA cease, allowing creditors to pursue their rights, such as issuing statutory demands or filing for liquidation. It’s vital for directors to engage with creditors and seek advice from an insolvency practitioner to manage these actions effectively.
Will failing a CVA affect my personal credit rating?
A failed CVA itself does not directly impact your personal credit rating. However, if you have personally guaranteed any company debts, defaulting on these could affect your personal credit. It’s important to review any personal guarantees and consult with financial advisers to mitigate potential impacts on your credit score.
What if I have personally guaranteed some of the debts?
If you have personally guaranteed some of the company’s debts, you may be held personally liable for these obligations upon CVA failure. Creditors can pursue you for repayment, which could lead to personal financial difficulties. It is advisable to seek legal advice immediately to understand your liabilities and explore possible solutions.
Can I still be a director of another company if my CVA fails?
Yes, you can still be a director of another company if your CVA fails. However, it’s important to ensure compliance with all statutory duties and avoid any conduct that could lead to disqualification. Demonstrating that you acted responsibly and took steps to minimise creditor losses is crucial in maintaining your directorships.
What if the CVA’s failure was due to circumstances beyond my control?
If the failure was due to uncontrollable circumstances, such as an economic downturn or unexpected loss of major contracts, it may not necessarily reflect poorly on your conduct as a director. Documenting these circumstances and showing that you took reasonable steps to address them can help protect against personal liability or disqualification risks.
