What If a Company Voluntary Arrangement (CVA) Fails?

A Company Voluntary Arrangement (CVA) can fail if a company breaches the terms of the arrangement, such as by missing agreed payments or failing to comply with other obligations set out in the proposal.

Not every breach leads to immediate termination. Depending on the circumstances, it may be possible to agree a variation to the arrangement, although creditor support will usually be required.

If the breach cannot be remedied and the CVA is terminated, creditors may regain the ability to take enforcement action and the company will need to consider alternative restructuring or insolvency options. These could include varying the CVA before termination, entering administration or proceeding to liquidation where appropriate. A CVA is designed to help viable businesses repay creditors over time, but its success depends on the company being able to meet its ongoing commitments.

If your company is currently struggling to meet its CVA payments, it is important to speak to your insolvency practitioner as soon as possible. Early action can often provide more options than waiting until a formal breach occurs.

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What does it mean when a CVA fails?

A Company Voluntary Arrangement is a legally binding agreement between an insolvent company and its creditors that allows debts to be repaid over an agreed period while the business continues trading. A CVA is approved if the required majority of creditors vote in favour of the proposal.

The success of a CVA depends heavily on future trading performance and cash flow. The company must generate sufficient income to meet both its ongoing business expenses and the agreed CVA contributions.

A CVA may fail if the company breaches the terms of the arrangement. Common examples include:

• Missing scheduled CVA payments
• Failing to pay ongoing tax liabilities
• Not providing required financial information
• Breaching specific conditions contained within the proposal

The exact consequences of a breach will vary depending on the terms of the individual CVA. The proposal usually sets out the process for dealing with defaults, any grace periods available and the circumstances in which the arrangement may be terminated.

The CVA supervisor, who is typically a licensed insolvency practitioner, oversees the arrangement, monitors compliance and communicates with creditors where necessary.  

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What is a CVA Supervisor?

A CVA supervisor is a licensed insolvency practitioner responsible for overseeing the arrangement after it has been approved by creditors. The supervisor monitors compliance with the CVA terms, collects agreed contributions, distributes funds to creditors and reports on the progress of the arrangement. If the company experiences difficulties complying with the CVA, the supervisor will usually be the first point of contact.

Find out more about how a CVA works in our guide to Company Voluntary Arrangements (CVAs) and how we help businesses.

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What causes a Company Voluntary Arrangement to fail?

Missed CVA payments

One of the most common reasons for CVA failure is missed or reduced contributions.

If payments are consistently missed and the arrears cannot be resolved, the supervisor may be required to take action in accordance with the terms of the CVA, which could ultimately result in termination of the arrangement.

Cash flow problems

Many businesses enter a CVA because they have experienced financial pressure. If cash flow problems continue or worsen, the company may struggle to meet its obligations under the arrangement and maintain normal trading activities.

Trading performance deteriorates

A CVA is often based on forecasts and projections. If sales fall, contracts are lost or market conditions change significantly, the business may generate less income than expected, making the arrangement unsustainable.

Failure to comply with other CVA terms

Payment defaults are not the only risk. Failing to provide financial information, file necessary returns or comply with reporting obligations may also constitute a breach of the arrangement.

The underlying business is no longer viable

In some cases, a CVA may initially appear achievable but later become unrealistic because the business is no longer commercially viable. When this happens, an alternative insolvency procedure may be more appropriate.

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What should you do if you think your CVA is going to fail?

Contact your CVA supervisor immediately

The earlier you raise concerns, the more options may be available. Ignoring financial difficulties rarely improves the situation.

Explain what has changed

Be transparent about the issues affecting the business, whether they involve declining sales, rising costs, customer losses or unexpected liabilities.

Prepare updated cash flow forecasts

Accurate forecasts help assess whether the difficulties are temporary or whether the business is facing more fundamental challenges.

Review whether the problem is temporary or structural

A short-term setback may require a different approach from a long-term decline in profitability or viability.

Consider whether the CVA can be varied

In some circumstances, creditors may be asked to consider amendments to the arrangement. Whether this is feasible will depend on the circumstances of the case and creditor support.

Take advice on alternative insolvency procedures if necessary

If the business can no longer sustain the arrangement, directors should explore other options as soon as possible.

A missed payment does not necessarily mean the company has no options. However, delaying action can significantly reduce the choices available.

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What happens after a CVA fails?

1. The CVA is terminated

If the breach cannot be remedied and the terms of the arrangement require termination, the supervisor will formally bring the CVA to an end.

2. Creditors are notified

The supervisor will normally notify creditors and other relevant parties that the arrangement has failed.

3. The protection provided by the CVA may end

Once the arrangement is terminated, creditors may regain the rights they previously agreed to suspend. This can include debt recovery action and, in some cases, winding up proceedings.

Following termination of a CVA, creditors may consider a range of recovery options, including winding-up proceedings where appropriate.

4. Outstanding debts need to be considered

The company must assess its outstanding liabilities and determine how creditors will be dealt with moving forward.

5. The company needs to consider its next step

Options may include:

• A revised restructuring plan
• Administration
• Creditors’ Voluntary Liquidation (CVL)
• Other rescue procedures where appropriate

Each option should be assessed based on the company’s financial position and future prospects.

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Does a failed CVA mean the company has to close?

No. A failed CVA does not automatically mean a company must immediately cease trading.

Whether the business can continue depends on factors such as:

• Its financial position
• Creditor pressure
• Available funding
• Future viability
• The availability of alternative restructuring solutions

Some businesses move into administration following a failed CVA and continue trading while a rescue or sale strategy is explored. Others may pursue different restructuring options before considering liquidation.

Every situation should be assessed individually and based on current financial information.

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What does a failed CVA mean for directors?

A failed CVA can be a significant turning point for directors, but it is important not to panic.

Directors should:

• Seek professional advice promptly
• Review the company’s financial position carefully
• Consider creditors’ interests where the company may be insolvent
• Avoid taking actions that worsen the company’s position
• Maintain accurate accounting and financial records
• Avoid favouring certain creditors without appropriate advice

Continuing to trade after a failed CVA requires careful consideration, particularly if the company is insolvent.

Directors should also avoid assuming that a failed CVA automatically makes them personally liable for company debts. In most situations, a limited company remains responsible for its own liabilities. However, personal guarantees and other factors may need to be reviewed.

You may also find our article on Who Is Liable for Debts in a Limited Company? helpful.

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What happens to HMRC debt if a CVA fails?

HMRC is often one of the largest creditors involved in a CVA.

If the arrangement fails, HMRC’s position will depend on:

• The type of debt involved
• The outstanding balance
• The company’s financial circumstances
• Any subsequent insolvency procedure

Directors should not assume that informal discussions with HMRC replace the protections and structure provided by a CVA.

Where HMRC is a significant creditor, obtaining specialist advice is particularly important because tax liabilities can influence the viability of any future restructuring proposal. HMRC generally expects future tax obligations to be paid in full and on time when supporting restructuring arrangements.

For further information, see our guide on Company Voluntary Arrangements and HMRC Considerations and how we help businesses, as well as What Happens If You Can’t Pay HMRC? Your Options.

Is Your CVA Becoming Difficult to Maintain?

A Company Voluntary Arrangement can provide valuable breathing space for a viable business, but changing trading conditions can sometimes make an arrangement difficult to sustain. The earlier potential problems are identified, the more options are usually available.

If your company is struggling to maintain its CVA or you are concerned about the possibility of failure, seeking professional advice early can help you understand the available restructuring and insolvency options. Find out more about our Company Voluntary Arrangement services or contact our Business Recovery & Insolvency team for guidance on your circumstances.