With almost four decades of experience in business, Mike Smith is one of the founders of Company Debt and one of the UK’s most experienced mediators with HMRC.
Having previously owned several of his own successful companies and occupied senior roles as a director within both Legal and General and Sun Alliance during separate periods of his career, Mike founded Company Debt with a genuine desire to help stressed directors in challenging circumstances. He is also an expert in the alternative finance sector.
Cash has run dry, suppliers are chasing, and HMRC’s red letters are piling up. Someone suggests a Company Voluntary Arrangement (CVA) as a neat way to shut the company down and walk away. Here is the reality: a CVA is designed to keep a firm trading while repaying debts, so it is rarely the right tool for outright closure.
This article explains why, compares every genuine exit route side by side, and ends with the safest next step you can take today.
The short answer – why a CVA is built for rescue, not closure
A Company Voluntary Arrangement is a turnaround tool, so if your goal is to close the doors for good, you are looking in the wrong place.
A CVA is a formal insolvency procedure under the Insolvency Act 1986. It allows a financially distressed but potentially viable company to reach an agreement with creditors to repay all or part of its debts over time while continuing to trade. Once approved, the arrangement becomes legally binding on the company and on the creditors covered by it.
The business remains on the Companies House register, directors stay in control of day-to-day operations, and the company continues generating revenue while making contributions to creditors under the arrangement.
Creditors often accept a CVA because it can produce a better return than liquidation, provided the business continues trading and generating income.
Put simply, a CVA aims to rescue and restructure, not to wind up. If outright closure is the objective, a Creditors’ Voluntary Liquidation or Administration is usually the appropriate route.
What a CVA cannot do:
Dissolve the company or remove it from the Companies House register.
Automatically terminate leases, supplier contracts or employment contracts.
Prevent later investigation of directors if the company subsequently enters liquidation.
How a CVA actually works once creditors approve it
Once the required creditor approval is obtained, the CVA becomes legally binding on the creditors who are entitled to vote on it.
Approval requires:
At least 75% (by value) of creditors who vote to support the proposal, and
The proposal must not be opposed by more than 50% (by value) of unconnected creditors who vote.
After approval, the insolvency practitioner who helped prepare the proposal typically becomes the supervisor of the arrangement.
The company continues trading under the control of its directors, but must follow the terms of the CVA proposal. These terms usually require the company to make regular contributions from trading profits, maintain financial reporting, and comply with ongoing tax obligations.
The supervisor monitors compliance and distributes funds to creditors according to the proposal.
Most CVAs run for three to five years, although the exact duration depends on the terms agreed with creditors.
Interest, charges, and the treatment of outstanding debts are determined by the specific terms of the CVA proposal rather than by automatic statutory rules.
Key milestones
Day 0: Creditors approve the CVA proposal.
Following approval: The CVA takes effect and becomes binding on creditors included in the arrangement.
Month 1 onward: Regular contributions begin according to the proposal.
Annual: Supervisor reviews progress and reports to creditors.
End of term: If the CVA completes successfully, the company is released from the debts dealt with under the arrangement according to the proposal’s terms.
Risks of choosing a CVA when the business is already beyond rescue
Opting for a CVA when the company has no realistic prospect of recovery can increase director exposure instead of containing it.
Because directors remain in control during a CVA, they must continue complying with their duties under company and insolvency law. If losses continue to mount and liquidation becomes unavoidable, earlier decisions may later be examined.
Immediate hazards
Wrongful trading risk: Directors must minimise creditor losses once insolvency becomes clear.
Professional costs: Insolvency practitioner fees apply even if the arrangement later fails.
Supplier confidence: Credit terms may tighten or shift to cash-on-delivery.
Guarantee exposure: Creditors may still enforce personal guarantees depending on the agreement.
Longer-term fallout
If the CVA fails, creditors may seek liquidation.
A later liquidator may review the company’s conduct before liquidation.
Failed restructuring attempts can damage commercial relationships.
Takeaway: if turnaround prospects are slim, moving directly to liquidation can sometimes limit further losses and provide a clearer route to closure.
Wind up an insolvent company and distribute assets
Rescue or sell the business or assets
Remove an inactive company from the register
Trading status
Business continues trading
Trading normally stops when liquidation begins
Administrator may continue trading temporarily
Company must have stopped trading
Cost profile
Professional fees for preparation and supervision
Liquidator’s fees paid from company assets
Often the highest fees due to complexity
Low Companies House filing fee
Director control
Directors remain in control subject to CVA terms
Control passes to liquidator
Control passes to administrator
Directors remain in control until dissolution
Investigation risk
Conduct may still be reviewed if insolvency later occurs
Liquidator must report on director conduct
Administrator must report on conduct
No automatic investigation unless concerns arise
Timeline
Usually several weeks to prepare; lasts several years
Typically initiated within weeks; liquidation may last months or longer
Administration typically lasts up to 12 months
Around three months from application to dissolution
A CVA buys time when there is a realistic recovery plan, but it rarely suits a company that intends to cease trading permanently.
That is why Creditors’ Voluntary Liquidation (CVL) is commonly used when an insolvent company needs to close.
When a CVA could still be the right move – viability checklist
A CVA only works when the underlying business can realistically return to sustainable trading.
Key indicators of viability include:
Positive projected cash flow within a short period.
Reliable revenue sources, such as confirmed contracts or repeat customers.
Creditor support, particularly from major lenders, landlords or suppliers.
No major unresolved litigation likely to disrupt trading.
Warning signs that a CVA may not succeed include:
Persistent trading losses with no turnaround plan.
Severe creditor pressure or imminent insolvency proceedings.
Insufficient working capital to sustain trading.
If several of these warning signs are present, liquidation options should usually be explored.
Signs your company should head straight to liquidation
Liquidation may be appropriate when the business has no realistic prospect of recovery.
Common indicators include:
Liabilities exceeding assets and an inability to pay debts as they fall due.
No credible turnaround plan.
Escalating creditor enforcement such as statutory demands or winding-up petitions.
Borrowing facilities exhausted.
Personal guarantees likely to be called.
The two main liquidation routes are:
Creditors’ Voluntary Liquidation (CVL)
Compulsory Liquidation
Who starts it?
Directors or shareholders
A creditor through the court
Control
Directors initiate the process
Court appoints the Official Receiver
Timing
Directors control the start date
Court timetable applies
Investigation
Liquidator reports on conduct
Official Receiver investigates
Director duties and personal exposure under each route
Once a company becomes insolvent, directors must prioritise the interests of creditors.
Wrongful trading
Directors can be ordered by a court to contribute to company losses if they continued trading when they knew, or ought to have known, that there was no reasonable prospect of avoiding insolvent liquidation.
Preference
Transactions that favour one creditor over others within certain periods before insolvency may be challenged and reversed.
Misuse or improper handling of company assets can lead to court claims against directors.
Investigation depth
CVA: There is no automatic statutory requirement to submit a director conduct report solely because a CVA has been approved.
CVL: The liquidator must investigate and report on director conduct to the Insolvency Service.
Personal guarantees
A CVA does not automatically remove personal guarantees. Creditors who hold guarantees may still enforce them depending on the terms of the guarantee and the creditor relationship.
Practical safeguards for directors today
Maintain accurate accounting records.
Avoid preferential payments to selected creditors.
Keep board minutes documenting key decisions.
Obtain professional advice before entering formal insolvency procedures.
Step-by-step timeline from decision to implementation
A CVA generally requires preparation before creditors vote on the proposal.
If proceeding with a CVA
Day 1: Directors consult an insolvency practitioner.
Weeks 1–3: Financial information is gathered and a proposal drafted.
Creditors receive notice of the decision procedure.
Creditors vote on the proposal.
If approved, the CVA takes effect and contributions begin under the agreed schedule.
If opting for CVL
Directors decide to wind up the company and consult an insolvency practitioner.
Shareholders pass a resolution to wind up the company.
A liquidator is appointed.
Assets are realised and creditor claims assessed.
The company is eventually dissolved.
Liquidation itself can continue for several months or longer depending on asset recovery and creditor claims.
Real-world scenarios – CVA rescue vs clean liquidation exit
Snapshot 1 – CVA used for turnaround
A regional business experiencing short-term financial pressure may propose a CVA that allows it to restructure debts while continuing operations. If creditors support the proposal and the business returns to profitability, the arrangement can provide a route to recovery.
Lesson learned: When the underlying business remains viable, a CVA can help restructure debt while preserving jobs and trading activity.
Snapshot 2 – Clean break through liquidation
A business with declining sales, mounting debt and no realistic turnaround strategy may choose liquidation. Assets are sold, creditors receive distributions where possible, and the company eventually closes.
Lesson learned: When recovery is unlikely, liquidation can provide a structured and lawful closure process.
Common misconceptions cleared up
Myth: A CVA is a simple way to close a company.
Fact: A CVA is designed to restructure debts while the company continues trading.
Myth: A simple majority of creditors can approve a CVA.
Fact: At least 75% of voting creditors by value must approve it, and unconnected creditors must not block it.
Myth: Contracts automatically end during a CVA.
Fact: Contracts continue unless renegotiated or terminated under their terms or applicable law.
Myth: Directors avoid scrutiny by choosing a CVA.
Fact: Director conduct may still be examined if the company later enters liquidation.
Myth: Personal guarantees disappear in a CVA.
Fact: Guarantees remain enforceable unless the creditor agrees otherwise.
FAQs
1) How long does a CVA take to set up?
Preparation usually takes several weeks because financial information must be gathered and creditors must be given statutory notice before voting.
2) Do CVAs always succeed?
No. Success depends on the viability of the business and the realism of the financial projections included in the proposal.
3) Will a CVA stop HMRC enforcement?
Once approved, HMRC is bound by the terms of the CVA in relation to the debts covered by the arrangement.
4) Can directors still be disqualified if the company is in a CVA?
Yes. Director disqualification proceedings can arise if misconduct is identified, particularly if the company later enters liquidation.
5) What are the professional fees for a CVA versus a CVL?
CVA costs usually include a nominee fee for preparing the proposal and ongoing supervision fees. Liquidation costs are typically paid from company assets realised during the process.
6) Can suppliers terminate contracts during a CVA?
Suppliers may rely on contractual termination rights depending on the contract terms and applicable insolvency law.
7) Does a CVA affect directors’ personal credit ratings?
A CVA applies to the company, not the individual director, although personal guarantees or financial connections to the company may affect personal finances.
8) Can I start another company while my current company is in a CVA?
There is generally no blanket prohibition, provided directors continue fulfilling their duties to the existing company.
9) Can landlords vote against a CVA?
Yes. Landlords are creditors and can vote on the proposal like other creditors.
10) Is dissolution possible if the company still has debts?
Voluntary strike-off has strict eligibility conditions and creditors can object if debts remain unresolved.
11) What happens to employees in a CVA compared with liquidation?
Under a CVA the company continues trading and employees usually remain employed. If the company enters liquidation, employees may be able to claim certain payments from the government if their employer is insolvent.
12) What happens if a CVA fails?
If the company cannot meet the terms of the arrangement, the CVA may be terminated according to its provisions. Creditors may then pursue other insolvency procedures such as liquidation.
13) Is administration faster than a CVA?
Administration can be implemented quickly in urgent situations, but it is typically used where there is a possibility of rescuing the business or selling it as a going concern.
Your next move – get tailored, confidential advice today
Deciding between a rescue CVA and liquidation requires a realistic assessment of the company’s finances.
Speaking with a licensed Insolvency Practitioner can clarify
Whether a CVA is viable
Whether liquidation is the safer option
The likely costs and timelines
The next practical steps available
Early advice can help directors minimise risks and ensure the company’s closure or restructuring follows the correct legal process.
