The Company Voluntary Arrangement Process – How does it work?
A Company Voluntary Arrangement, or CVA, provides an exit from administration that repays a proportion of debts and halts creditor action against you. It could be an option if your company is deemed viable for the future by a professional insolvency expert, and therefore stands a chance of returning to profitability.
But what does the process involve, and could it be the right choice for your business? We provide a timeline of events below, and a little insight into the main aspects you need to consider before taking out a CVA.
What is a CVA?
A CVA is an agreement between a company and its creditors to repay debts over an extended time period. The agreement will include details of debts that are to be written off at the end of the term. Interest and charges are frozen, and creditor action is stayed when the CVA comes into force.
The input and guidance of a professional insolvency practitioner is vital once you are aware that your company is struggling financially. This will safeguard your own interests as a director, and help to avert any future accusations of wrongful trading.
By using a Company Voluntary Arrangement you maximise your creditor interests, and ensure that the rules of insolvency are met. The timescale for establishing a CVA can be around 10 weeks, which includes the voting procedure and filing the agreement at court.
Begbies Traynor offers professional advice on all formal insolvency routes, and can provide guidance on whether a CVA is the best option for your company.
Timeline of events during the CVA process
Here we provide a general idea of what happens during the various stages of a CVA:
- Following a formal decision by directors to enter this route out of administration, a professional insolvency practitioner is appointed to set up the agreement.
- The IP undertakes a full review of the company’s operations and financial processes to produce a draft proposal for the agreement of directors. Financial forecasts for up to five years are included, and these assist creditors in their decision about whether to vote in favour.
- Directors contact secured creditors, the bank for example, to let them know how their lending will be repaid.
- The proposal is lodged at court and given an originating number, after which copies are sent to all unsecured creditors.
- There is a minimum period of 14 days during which creditors can consider how they will vote. In practice, a longer period of time is often provided to allow HMRC and others the time they need to ensure the repayment levels will meet their needs.
- At the meeting of creditors, questions can be asked of the directors and a vote takes place that dictates whether or not the CVA will be accepted.
- 75% (by value of debt) of the creditors need to agree to the proposal, after which another vote is taken without the inclusion of connected creditors. This vote requires at least 50% of votes to be in favour.
- Once the meetings have finished, the insolvency practitioner is required to submit a written report to the court and all creditors. This is done within four days of the vote, and details the outcome, who was present, and how each person voted.
- Interest and charges on all debts are frozen, and repayments made as set out in the CVA.
- As long as all terms and conditions are adhered to, creditors are prevented from taking any further legal action against the debtor company.
What level of repayments?
It is advisable to remain conservative when considering repayment amounts. Steering clear of any lump sum payments during the course of the CVA is also a good idea so that the company is not put under unnecessary pressure.
It is far better to err on the side of caution when predicting future profits in this situation, making sure that repayments are sensible and manageable.
Levels of payment are often incremental in line with profit levels over the lifetime of the agreement. If any repayments are missed, the CVA could quickly become null and void and the company liquidated – hence the need for caution over repayment amounts.
Once the CVA term ends
Your IP provides a completion certificate at the end of the agreement. The company is released from its obligations, and any remaining debts that were included in the agreement are written off.
A Company Voluntary Arrangement has many advantages – the opportunity to trade your way out of debt and continue to control company operations being just two.
Begbies Traynor is the largest UK business recovery practice, and with local offices you can quickly receive the professional advice you need. Contact one of our expert team to arrange a free same day consultation.