What is the difference between a CVA and Liquidation?

Company liquidation and CVAs, though both formal insolvency procedures diverge significantly in their intended outcomes.

A Creditors’ Voluntary Liquidation (CVL) marks the conclusion of a business that is insolvent and beyond the prospect of recovery. Conversely, a Company Voluntary Arrangement provides an opportunity for a financially challenged but fundamentally viable company to navigate its way out of present difficulties. 


How does a CVA work?

A Company Voluntary Arrangement entails formal negotiations between an indebted company and its creditors, overseen by a licensed insolvency practitioner (IP).

Upon reaching an agreement with 75% of creditors (by debt value), the company’s debts undergo restructuring, enabling repayment through a series of manageable instalments over the typical 3-5 year duration of the CVA. As part of the process, some debt may be written off.

The company’s repayments are then distributed among creditors in the pre-agreed proportions. As long as the payment schedule is maintained, creditors are prevented from taking legal action to close down the business or demand additional payments from the company or its directors personally.


CVA as an alternative to company liquidation

Long-term viability stands as a key eligibility criterion for a Company Voluntary Arrangement (CVA). The insolvency practitioner, serving as the nominee for the proposed CVA, must hold the belief that the business can sustain the newly agreed payments throughout the entire arrangement period. Any failure in the CVA opens the possibility for creditors to petition for the winding-up of the company.

In some instances, only a portion of the original debts is repaid, and the remaining debts are written off. Regardless, a CVA provides the opportunity to commence afresh without the burden of debts and constant pressure from creditors. It can be a favourable option when the circumstances align.


What is Creditors’ Voluntary Liquidation?

At times, Creditors’ Voluntary Liquidation becomes the sole viable choice for failing businesses. In such circumstances, it can be advantageous for directors and creditors alike, alleviating the burden of attempting to rescue a collapsing company.

As a director, you retain a level of control in the process – you can select your preferred liquidator and determine the timing of entering liquidation. This contrasts with a scenario where the situation escalates to the point where a creditor petitions the court for your company’s compulsory liquidation. In such a case, you would have no influence over when the company enters liquidation or the choice of the appointed liquidator.

In a Creditors’ Voluntary Liquidation (CVL), the liquidator sells the company’s assets to generate the maximum possible dividend for creditors. Upon completion of the process, the company is struck off the register and ceases to exist.


Benefits of entering a CVL

While it results in the closure of the company, Creditors’ Voluntary Liquidation does present certain advantages. It enables directors to fulfil their legal obligations, alleviates pressure from creditors, and facilitates moving forward.

Moreover, it may entitle directors to claim redundancy pay. If there’s concern about how the company would finance the insolvency process during liquidation, many directors utilise redundancy pay to cover associated costs.

The ability to meet legal obligations is crucial, as failure in this regard could lead to disqualification or even personal liability for the company’s debts.


CVA or CVL: Which is right for your company?

The effectiveness of the two processes is significant, each having its own merits. The choice between them is influenced by the specific circumstances of your business. Additionally, there might be other formal insolvency procedures or informal alternatives such as securing additional funding that could be suitable.

An insolvency practitioner would evaluate the potential for rescuing the company and provide professional advice and guidance. If your company is fundamentally viable but experiencing short-term financial distress, a Company Voluntary Arrangement (CVA) might be a suitable option. 

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Seek insolvency advice

Seeking professional guidance at the earliest opportunity is crucial, as it opens up more potential options. If your company is presently insolvent or you anticipate insolvency in the near future, it is a legal obligation to seek assistance from a licensed insolvency practitioner (IP).

Vanguard Insolvency specialises in insolvency matters and can offer trustworthy independent advice. Please contact our team, led by partners, to schedule a free, same-day consultation. With offices nationwide, we can promptly provide assistance regardless of your location. 

David Jackson MD
Senior Partner at Vanguard Insolvency Practitioners | Website

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.