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How CVAs & CVLs Affect Personal Guarantees During Insolvency

Posted by Todd Davison on Jul 28, 2022 1:00:00 PM

Insolvency – something that you probably don’t want to think about, especially if you’ve taken out a personal guarantee on a business that may be struggling, but it’s important that we do.

You may be unsure when your personal guarantee will trigger during your insolvency, and whether there’s anything you can do to reduce damage to your assets/company.

While the solutions to liquidation may seem finite, there are courses of action you can take.

In this article, we’ll explore how personal guarantees work in the event of insolvency and how businesses can benefit from having CVA (Company Voluntary Arrangement) and CVL (Creditors Voluntary Liquidation) agreements in place during the liquidation process.


Personal guarantees during insolvency


If you are a company director who has signed a personal guarantee, you need to know at what point you become personally liable for debts if your business goes into liquidation.

A creditor who has agreed to a personal guarantee will want repayment as soon as your company has gone into liquidation, there is rarely any wiggle room.

If your debt has been secured by a personal guarantee and is not repaid in full by selling company assets, the creditor can turn to the directors for payment, as they are responsible for debt.


Your personal guarantee only activates if your company assets cannot cover your debt.


While it’s never fun to prepare for these scenarios, it’s important to be aware of your options, and there are things that you can do to protect your assets and your business.

With a CVA or CVL in place, you can reduce any further damage caused to your business by liquidation.

This is possible by either breaking down the cost of the debt repayments into manageable instalments, or easing your business into liquidation, enabling you to minimize the damages.



What is a CVA (Company Voluntary Arrangement)?



A CVA is an agreement made between business directors and creditors, using an insolvency practitioner as an intermediate to negotiate.

If a company is made insolvent, a director can use a CVA to arrange regular payments of their company debts to creditors over a fixed period.

 A CVA is crucial to the revival of a business during insolvency, because if creditors agree to it, it means that your company can carry on trading while making debt repayments.



What is CVL (Creditors Voluntary Liquidation)?



CVL is a process that begins with directors who arrange to meet with creditors to discuss placing your company into liquidation.

If the creditors decide that liquidation is the correct course of action, an insolvency practitioner is appointed to act as a liquidator and to manage the CVL process.

The insolvency practitioner is then responsible for assessing your business’ assets and clarifying the claims of the creditor. They’ll also investigate you, your company and the conduct of all directors to prove whether the creditors’ best interests were acted upon while you were trading.



How can CVAs and CVLs affect your business during insolvency?



In the event of insolvency, having either a CVA or CVL in place can strongly benefit your business as well as your personal guarantee:

 -   A CVA reduces the pressure on businesses that need to make debt repayments by turning them into manageable and scheduled payments.

  •  -   A CVA also allows a business to carry on trading, despite financial issues.


  •  -   Depending on the terms of the CVA agreement, the loan is less likely to be recouped through your personal guarantee, giving you both a chance to save your business while helping protect your money.


  •  -   A CVL gives a director the chance to limit any further financial damage by placing the company into the liquidation before it’s forced to by creditors.


  •  -   A CVL can benefit a director from a professional stand point. A director that faces the issue of insolvency head on raises the chances of preserving their business reputation, in comparison to a director who has to be forced into the process of liquidation through frustrated creditors.


How to choose whether a CVA or CVL is better for your business



While you may feel that a CVA is the preferable option, allowing your business a chance to get on its feet again, the right choice for you in the event of insolvency depends entirely on the amount of company debt you face.

Normally a business facing insolvency focuses entirely on repaying debts using business assets before ceasing to trade completely.

A CVA allows you the opportunity to revive your business despite financial issues, this can be a good option if your financial forecast looks positive and you can see a way to build out of your debt over time.

However, if you feel that your company cannot return to its previous level of operation or survive financially under the scheduled payments of a CVA, then a CVL agreement is likely the best option.

A CVL agreement makes it possible to reduce excessive damage, despite inevitable liquidation. You may choose this option if you feel that it’s better to get the liquidation process over with.



Personal Guarantee Insurance from Purbeck



 While CVAs and CVLs can be beneficial to your business during the insolvency process, don’t forget that they are not a certainty.

Both agreements require 75% of your creditors’ approval, which you might not get, leaving your assets vulnerable. That’s why it’s wise to give yourself peace of mind by covering your personal guarantee.

 At Purbeck, we are the leading provider of tailored personal guarantee insurance, ensuring that, in the unfortunate case of insolvency, up to 80% of the value of your assets are covered.

 For information on the services we provide, if you need any advice on personal guarantee insurance, or if you want to know more about your personal guarantee during insolvency, don’t hesitate to get in touch with one of our friendly and professional team.

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