Normally, the laws do not allow a limited company to continue trading after becoming insolvent. So the directors of an insolvent company opt for Company Voluntary Arrangement (CVA) to reach a voluntary agreement with creditors to pay the debts over fixed period of time. A company can apply for CVA only if all its directors or members agree. Likewise, the CVA proposal must be accepted by creditors with 75% of the debt value. However, a limited company can still reap several benefits by applying for a CVA.
Major Advantages of a Company Voluntary Arrangement
- Write off Unsecured Debts: The CVA enables a limited company to repay its debts over a fixed period ranging from 3 to 5 years. At the end of the fixed term, the company can write off the unsecured debts that are still outstanding. So the limited company can get rid of all its unsecured debt by the time CVA ends.
- Option to Include HMRC and VAT Debts: The insolvency practitioner deployed by the company will invite all unsecured creditors for a meeting to vote the CVA proposal. So he can even convince HMRC to agree to the arrangement. Thus, the company’s outstanding VAT debts, PAYE or corporation tax can also be repaid over a fixed period of time.
- Option to Repay Overdrawn Current Accounts: The adverse cash flow situation of a company often compels its directors to overdraw current accounts. The CVA allows the directors of the company to repay the overdrawn current accounts over a fixed period of time.
- Legal Protection from Creditors: Once the CVA is accepted by creditors with 75% debt value, it is bound for all creditors. So the CVA will prevent the creditors from taking any legal action against the limited company. The arrangement will provide legal protection to the company from the current and future legal actions. The CVA implementation can further help the company in avoiding winding up petitions.
- Relief for Directors: As noted earlier, a CVA helps company in avoiding liquidation. So there is no need to investigate the conducts of directors by a liquidator. As the company agrees to repay all its unsecured debts over a fixed period of time, the directors will not be accused of wrongful trading.
However, the directors must understand the pros and cons of a CVA before applying for the process. As the law prohibits the insolvency practitioner to give any advice or suggestion to the directors, it becomes essential for them to avail specialist consultancy service. The directors of a limited company can always avail specialist consultancy service from Insolvency&Law to manage the CVA process more effectively.