As with any agreement, a CVA carries obligations and protections. When compared to a contract signed when say, purchasing a house, there will be benefits, but there are also certain rules you must adhere to. In this blog, we’re letting you know the legal and financial implications of a CVA.
Legal implications of a CVA
A Company Voluntary Arrangement (CVA) is legally binding. This means that you must abide by the agreed terms once you enter into a CVA. Once you’ve committed, you have to stick to the rules. There are no months off with a CVA.
An insolvency practitioner acts as a supervisor for the CVA. They are there to ensure that all parties, you and your creditors, play by the rules. If a company fails to stick to the terms outlined in a CVA, creditors will take legal action. It’s the same as any other contract; if you don’t pay the rent, you will get evicted.
Financial implications of a CVA
Sometimes, a CVA can help a company manage their debt more effectively. One aspect of a CVA is rescheduling your payment terms to suit your cash flow better.
It is worth noting that a CVA is going to impact your credit rating negatively. The concept is similar to if you were to stop paying your credit card debts on time, it would impact your personal credit score. A CVA will significantly affect your business’ credit score while you’re in it.
During a CVA, shareholders may not receive any dividends. If dividends are received, they definitely won’t be at the same level as they were before entering the CVA. It’s highly likely that you’ll need to pause big payouts to people within the company while you’re in the CVA.
How does a CVA affect employees?
A CVA can also impact employees and their wages. Often CVAs can lead to job losses or pay cuts. When your business has its back against the wall, some very tough decisions will need to be made. Some of these decisions may involve job cuts or reducing people’s salaries.
How does a CVA affect directors?
Directors have many responsibilities and liabilities in a CVA process. Sometimes, it can be appropriate for directors to relinquish some control over the company’s finances. As a director, you may need to employ a financial director who can manage the business’s cash flow. Some directors prefer to pass on some control to try and get out of the situation in a more efficient way.
In a CVA, directors are still liable for things like personal guarantees. We’ve had a few chats recently where directors have taken many personal guarantees, and a CVA won’t do anything for you in this case.
In conclusion, it’s very important to understand that CVAs are very complex legal processes with serious implications. A CVA can definitely help to provide relief, but they also come with risks and responsibilities.
If you are interested in the process of a CVA, please don’t rush into it with the first person you speak to. Make sure that you seek advice from insolvency professionals who have lots of experience dealing with CVAs. We hope that you’ve found this blog useful regarding the legal and financial implications of a CVA, don’t hesitate to contact us if you need any support. We’re here to help you as the company director.
Justin Barker
I’m Justin Barker, the Managing Director at 1st Business Rescue. I have over 25 years of experience providing insolvency advice to business owners.
I understand how challenging it can be when dealing with financial difficulties within your business. It’s easy to ignore the problem and hope that it disappears, but this is often the worst thing you can do. Our dedicated team is here to provide honest, valuable advice to help UK directors deal with their personal situations in the most appropriate way.
No case or circumstance is the same, but I can guarantee that I am there to give you the best advice.
We are one of the only 5-star corporate insolvency companies on Trustpilot, with hundreds of 5-star reviews. Contact our friendly team for insolvency advice.