A CVA is a contract between a company and its creditors which offers the creditors a better financial outcome than would be achieved in a liquidation situation. The company often continues to trade, usually under the control of its Directors, with a view to paying creditors either out of future profits, or from a more beneficial realisation of the company’s assets, or both. 100p in the £ does not have to be offered. The Supervisor (as the appointed Insolvency Practitioner is called in this instance) monitors the company’s performance to ensure the terms of the Proposal are complied with but without undue interference in the day to day management of the company’s affairs.

75% of creditors (each £1 of debt equates to one vote) are required to support the Proposal. Thereafter, all creditors given notice of the Proposal are bound by its terms. Secured creditors are not bound by the CVA but usually continue to provide support.

An Administrator can be appointed if the Directors, the holder of a floating charge or the creditors consider that the objective(s) of the company can be best achieved by this route. The objective(s) may include the survival of the company as a going concern (in whole or in part); the approval of a CVA and / or a more advantageous realisation of the assets than in a liquidation scenario. The Administrator has more involvement in the day to day management of the company which is protected from its creditors when the Administration Order is made, thereby providing a ‘breathing space’ to enable the recovery plan to be formulated and implemented.

An Administrative Receiver can only be appointed by the holder of a valid floating charge. Following legislative changes introduced in September 2003 the appointment of an Administrator has become the more usual procedure because the interests of all categories of creditor are thought to be better served by that process.

A compulsory liquidation ensues when a creditor has successfully presented a winding up petition to the Court. The Official Receiver (“the government’s liquidator”) is appointed initially, although a private practitioner may subsequently be appointed if there are assets to be realised and distributed. The process is much slower and more expensive than a CVL, primarily because statutory fees of 17% are charged on all realisations after the first £2,000, in addition to the liquidator’s remuneration.

A CVL is so called because the Directors and shareholders voluntarily take steps to place the company into liquidation.