Termination of Company Voluntary Arrangement (CVA)
The Termination of a Company Voluntary Arrangement (CVA) is a significant event within the insolvency procedure, indicating that the company has either failed to meet its obligations or that creditors have lost confidence in the arrangement. Upon termination, creditors can resume actions to recover their debts, and the company may face further insolvency measures such as administration or liquidation. Staying informed of the CVA’s progress and understanding the potential consequences of termination is crucial for all parties involved in the process.
Termination of Company Voluntary Arrangement (CVA): Key Insights into the Insolvency Procedure
The Termination of a Company Voluntary Arrangement (CVA) marks the end of a formal arrangement between a company and its creditors, typically used to restructure a company’s debt and prevent insolvency. A CVA is a crucial element of the UK’s insolvency procedure, designed to help a financially distressed company avoid liquidation by allowing it to repay creditors over an agreed period. However, a CVA can be terminated if the terms of the arrangement are not fulfilled or if the creditors decide it’s no longer viable.
What is a Company Voluntary Arrangement (CVA)?
A Company Voluntary Arrangement (CVA) is an insolvency mechanism governed by the Insolvency Act 1986, which allows a financially troubled company to reach a legally binding agreement with its creditors to repay a portion of its debts over time. It provides the company an opportunity to continue trading while repaying creditors from future profits or other sources of income.
The CVA is proposed by the company’s directors but must be approved by at least 75% of creditors by value. Once agreed, it is overseen by an insolvency practitioner acting as the supervisor to ensure the terms are followed.
Reasons for Termination of a CVA
The termination of a CVA can occur for several reasons, usually triggered by the company’s failure to comply with the terms of the agreement. Common reasons for termination include:
- Failure to make agreed payments: If the company does not keep up with the agreed schedule of payments to creditors, the CVA may be terminated.
- Breach of CVA terms: If the company violates other conditions set out in the CVA, such as failing to provide necessary financial information, the insolvency practitioner may seek to terminate the arrangement.
- Creditor decision: Creditors may collectively decide that the CVA is no longer viable, especially if the company’s financial situation worsens and they believe liquidation or administration would offer better returns.
- Court action: In certain cases, creditors can petition the court to terminate the CVA if they believe the arrangement is not being properly carried out or is unfair.
What Happens When a CVA is Terminated?
Once the Termination of a CVA occurs, the company loses the protection afforded by the arrangement. This means creditors can resume pursuing legal action, such as filing for winding up or petitioning for administration, to recover outstanding debts.
The insolvency practitioner overseeing the CVA will notify all relevant parties—creditors, directors, and shareholders—about the termination. This notification typically includes details on why the CVA failed and the potential next steps, which may involve placing the company into administration or liquidation, depending on its financial situation.
Legal and Financial Implications of Termination
The termination of a CVA can have significant implications for the company:
- Creditor Actions: Upon termination, creditors regain the right to take legal action against the company, such as issuing winding-up petitions or seeking other recovery measures.
- Potential Insolvency: Termination may push the company towards further insolvency procedures, such as liquidation or administration, where its assets will be sold to repay creditors.
- Impact on Directors: Directors may need to consider the potential for personal liability, particularly if wrongful trading or mismanagement contributed to the failure of the CVA.
For creditors, termination may represent an opportunity to recover a greater portion of their debts through a more formal liquidation or administration process. However, it may also mean they receive less than what was originally agreed under the CVA, depending on the company’s remaining assets.
What Should Creditors and Shareholders Do?
Creditors and shareholders should closely monitor the progress of the CVA and be prepared for its potential termination. If a CVA is terminated, creditors will need to decide on their next steps, whether that involves pursuing legal recovery or supporting alternative insolvency solutions like administration. Creditors can also engage with the insolvency practitioner to understand the reasons for termination and assess their best options moving forward.
Useful Links for Further Reading:
- UK Government Insolvency Service: Official guidance on CVAs and other insolvency procedures.
- R3: Association of Business Recovery Professionals: Information for creditors and companies dealing with insolvency, including CVA termination.
- Companies House: CVA and Insolvency Guidance: A detailed guide on how CVAs work and what happens when they are terminated.
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