If a CVA (Creditors’ Voluntary Arrangement) is rejected, it means that the majority of creditors did not approve the plan for the company to repay its debts over a certain period of time.
This can happen if the creditors do not believe the plan is feasible or if they do not believe they will receive a sufficient amount of their debt back.
When a CVA is rejected, the company will typically enter into liquidation, also known as bankruptcy. This means that the company’s assets will be sold off to pay off its creditors as much as possible.
Any remaining debts will be written off and the company will be dissolved.
The directors of the company may also be held personally liable for any unpaid debts. It’s important to note that in some cases, a new CVA can be proposed, it’s best to consult with an insolvency practitioner to determine the best course of action in this case
Why might the CVA be rejected?
There are several reasons why a CVA may be rejected:
- The plan does not provide a fair return for the creditors: Creditors will typically reject a CVA if they do not believe they will be repaid a sufficient amount of their debt.
- The company is not viable: If the company is not able to generate enough revenue to repay its debts, creditors may reject the CVA.
- The company does not have enough assets to repay its debts: Creditors will reject a CVA if they believe the company does not have enough assets to repay its debts.
- The CVA proposal is not well structured: If the CVA proposal is not clear or well-structured, creditors may reject it.
- The company’s directors have not provided enough information: Creditors need to have enough information to make an informed decision about whether to approve the CVA. If the company’s directors do not provide enough information, the CVA may be rejected.
Many of these issues can be addressed in advance, and any reputable professional adviser won’t submit a proposal that is badly written and likely to be rejected. Sadly, some professionals occasionally suggest CVAs knowing that a liquidation or administration is probably the end result and are only buying time.
Although CVAs are the ideal tool for the specific instance, practitioners frequently lack experience with them and so present irrational expectations or fail to see issues in the business. Most of the time, it is necessary to convince the creditors that significant changes will be made to the managerial, financial, and cost structures.
Creditors Review Process
An insolvency practitioner draughts a CVA proposal, which is then evaluated by the business’s directors. The CVA will be presented to the court and a copy will be issued to each of the firm’s creditors if the company directors are satisfied.
Before the CVA is enforceable, it must first be approved by the creditors and shareholders of the corporation. Initially, a shareholders’ meeting is convened. The document must receive the approval of 50% of the shareholders (measured by value).
A creditors’ meeting will be held after the shareholders have approved the suggested CVA arrangements. In this instance, the CVA cannot be approved unless 75% of the company’s creditors (measured by the amount of debt) concur. It is usual for creditors to reject the conditions of the CVA at this point if they are unhappy with the suggested value of their repayments.
What if the CVA is Rejected by the Shareholders or Creditors?
You will need to carefully consider the alternative company rescue options available to save your business if the provisions of your CVA are rejected by the company’s shareholders or creditors. Creditors may feel there are other options available in some circumstances that could boost their prospective return. This is rarely the case in practise.
Unsecured creditors are not considered a priority in insolvent liquidations, so in many circumstances, creditors pursuing a liquidation are unlikely to obtain any recovery at all. Because of this, a solid CVA that proposes to pay off at least a portion of the company’s debt should be approved.
Alternatives if the Company Voluntary Arrangement Isn’t Accepted?
There are normally three possibilities remaining for you to think about if your CVA is denied and you have previously looked into all of the alternative financial options available to your company.
Administration – Your company has up to eight weeks after going into administration to come up with a plan to save or restructure the company. Any active creditor litigation is stopped during this time, and an insolvency practitioner is appointed to assume control of the business. It is their responsibility to either save the business so that it may continue as a going concern or to sell off business assets to pay off creditors.
Pre-pack Administration – In a pre-pack administration, a business is advertised and sold in advance of the appointment of an administrator. In many instances, the company’s owners or directors will purchase the company’s assets and form a new corporation that trades under a different name. There are various regulations in place to ensure that the pre pack administration process achieves the best result for the company’s creditors because this mechanism has historically been exploited.
Creditor’s Voluntary Liquidation (CVL) –The company directors may have little choice but to start a creditors’ voluntary liquidation if the provisions of a CVA are refused. By doing this, the firm will be able to prevent a forced liquidation, which can be worse for the directors of the company. The company’s assets will be liquidated under a CVL for the benefit of the company’s creditors, but the directors are less likely to be subjected to scrutiny that could result in claims of improper or illegal trading.
Read more: How are employee affected in a CVA
Conclusion
If your CVA has been rejected, it means that the majority of creditors did not approve the plan for the company to repay its debts over a certain period of time. This can be a difficult situation for the company and its directors, as it means that the company will typically enter into liquidation, also known as bankruptcy. This means that the company’s assets will be sold off to pay off its creditors as much as possible.
Any remaining debts will be written off and the company will be dissolved. The directors of the company may also be held personally liable for any unpaid debts. However, it’s important to note that the rejection of a CVA is not the end of the road, it’s best to consult with an insolvency practitioner or business advisor to determine the best course of action.
They may suggest other options such as a new CVA proposal, an administration, or a pre-pack administration which can be a great way to restructure the company and continue trading. Simply complete the online enquiry to discuss your options.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.