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Company Voluntary Arrangement (CVA)

 

When a business company falls into difficult debt repayment situation, it faces two options, liquidation or debt resolution. The liquidation of the business not only kills the business itself but also destroys its reputation. The better alternative, obviously, is to go for rationalization of repayment of debt. This can be done through two options. 

  • Company Voluntary Arrangement (CVA)
  • Creditor Voluntary Liquidation—(CVL)

Company Voluntary Arrangement: The provisions of Company Voluntary Arrangement in company law are almost similar to those of the Individual Voluntary Arrangement in personal bankruptcy law. A CVA strives to bring about an agreement between the company and its creditors. A special feature of CVA is that the borrowing company seeks extra time for repayment of its debts and also requests the creditors to write off a certain part of the debts.
 
In most cases, the deal fructifies because the creditors consider this arrangement as a lesser evil as compared with the liquidation of the company. While they are likely to receive some part of the debt in CVA, they may receive almost nothing in the latter situation. Moreover, they also think that they would benefit more from trading with the company if it keeps working and may even prosper in the future. Also, the company remains under the management of its board of directors.
 
An important proviso for the arrangement is that it has to be agreed upon by the lenders of 75% of the total amount of debt money. They agree to the Company Voluntary Arrangement only if they are assured that the management of the company will continue to work satisfactorily and also that it will manage adequate funds to redeem its repayment commitments as they fall due.
 
A CVA is beneficial for the borrowing company in several ways:
 

  • It is spared of bankruptcy or liquidation.
  • It continues trading.
  • 75% of its unsecured debt is wiped off.
  • It becomes debt free within 60 months.
  • It is allowed to pay affordable monthly repayment installments.
  • All the interest and charges are stopped.

 
A CVA option is appropriate only when the company is faced with certain specific but isolated events that are not expected to come up in future. These events may include signing an unprofitable contract, uninsured fire or flood accident. These events do not adversely reflect upon the ability of the management to carry on the business in a profitable manner in the future.  

Creditor Voluntary Liquidation: Creditor Voluntary Liquidation implies the cessation of the company’s operations, sale of its assets and their disbursement among its lenders so that it can be finally dissolved. The liquidation of the company takes place through a resolution by its shareholders. It does not take place through the orders of the court as in case of Individual Voluntary Arrangement—IVA.


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