CVA v Liquidation How does a CVA compare to liquidation?
A Company Voluntary Arrangement (CVA) and liquidation are two distinct processes that serve different purposes when a company is facing financial distress. Here are the key differences between a CVA and liquidation:
CVA: The primary objective of a CVA is to rescue a financially troubled company from insolvency and allow it to continue trading while addressing its financial difficulties. It aims to provide a structured framework for the company to repay its outstanding debts over a specified period, often with reduced monthly payments and extended terms.
Liquidation: Liquidation, on the other hand, is a process that involves selling off a company’s assets to pay its creditors and winding down its operations. The ultimate goal of liquidation is to dissolve the company and distribute its remaining assets to creditors. Liquidation is typically pursued when a company is no longer viable or when there is no realistic prospect of recovery.
Continuity of Business
CVA: A CVA allows the company to continue trading and operating its business. This is crucial for preserving brand reputation, retaining employees, and maintaining customer relationships. The business undergoes financial restructuring while still functioning.
Liquidation: Liquidation results in the closure of the business. All assets are sold off, and the company ceases to exist. Employees are typically laid off, and the company’s operations come to an end.
CVA: In a CVA, the company agrees to repay its outstanding debts to creditors over a fixed period, often with reduced and more manageable payments. Creditors receive a portion of what they are owed, and any remaining debt is typically written off upon successful completion of the CVA.
Liquidation: In liquidation, creditors are paid from the proceeds of selling the company’s assets. However, creditors usually do not receive the full amount owed to them, and some may not receive any payment if the assets are insufficient to cover all debts.
CVA: A CVA is a formal but voluntary agreement entered into by the company and its creditors. It requires the approval of at least 75% of creditors (by value) who participate in a vote. It is a legal process but is designed to help companies avoid insolvency and liquidation.
Liquidation: Liquidation can be initiated either voluntarily by the company’s directors (voluntary liquidation) or through a court order (compulsory liquidation) initiated by creditors. It is a formal legal process that involves the appointment of a liquidator to oversee the asset sale and distribution to creditors.
Outcome for the Company
CVA: A successful CVA allows the company to continue operating, ideally with a reduced debt burden and a plan for financial recovery. The company has a chance to return to profitability.
Liquidation: Liquidation marks the end of the company. Its assets are sold off to pay creditors, and the company is formally dissolved. There is no ongoing business.
In summary, a CVA is a process designed to rescue a financially troubled company and facilitate its recovery, while liquidation is a process for winding down and closing a company when recovery is not feasible. The choice between these options depends on the specific financial situation and goals of the company in distress.