Company Voluntary Arrangement (CVA)
A CVA is a formal process enabling a compromise to be entered into between a company and its creditors, based on a vote passed by a majority of creditors greater than 75% of those voting on the proposal.
All creditors are then legally bound to accept the terms of the arrangement – including those who were non-voting or did not receive notice of the meeting which provides structure for a proportion of the debts to be repaid over a fixed period of time – typically monthly contributions to the CVA supervisor.
Alternatively the company may look to sell assets and repay creditors from the proceeds. Whichever agreement is put in place, all involved parties are contractually bound to adhere to the terms and conditions set out.
It is a fairly common insolvency solution as an act of recovery; particularly for companies that are struggling under the burden of debts but are still viable businesses. For directors wishing to retain control of the company and attempt to trade out of difficulties, a CVA is likely to be the most suitable solution.
For a CVA to be approved, creditors will need reassuring that the repayment proposals and projections are realistic and the agreement will be overseen by a licensed insolvency practitioner or ‘supervisor’. Where the company proposes to make monthly contributions from income, it is clearly important that it is able to afford them.
Creditors are usually willing to support a CVA - even though they’re unlikely to recover all that they are owed - as opposed to alternative solutions such as company liquidation which would see them receive significantly less.
Once CVA terms have been agreed by creditors, existing contractual terms are changed to reflect the terms of the CVA. Agreements are usually reached in situations where creditors stand to gain more by taking this route, rather than forcing a company into liquidation; an added benefit for them being the potential of trading with a viable customer in the future.
Eligibility for a CVA
Although a company must be regarded as insolvent/contingently insolvent, the appointed insolvency practitioner should be satisfied that the business is a ‘going concern’ operating under fundamentally sound practices.
Projected cash flow forecasts will be required as evidence of the company’s ability to meet CVA terms, with clear and accurate financial reporting systems being beneficial to the smooth-running of the process.
Begbies Traynor can help company directors in this situation. We are licensed insolvency practitioners with a wealth of experience in all industries.
What are the benefits of a CVA?
- It is a flexible, legally-binding tool that offers protection from creditors
- The company is able to carry on trading, and can restructure to improve overall profitability
- Debt repayments are consolidated into one single payment
- Cash flow can quickly improve, providing increased working capital
- Company Voluntary Arrangements can be cheaper than other insolvency options as they do not involve the court, apart from when challenged. Costs in the range of £5,000 to £10,000 are common, but vary depending on the work involved
- Steps can be taken to reduce outgoings - for example, ending leases and employment contracts
- The company situation is not advertised publicly as in the case of company administration
- If action is taken quickly enough, a CVA can prevent a winding-up petition from taking effect
- A CVA offers reassurance to creditors that some of the debt will be repaid
- Creditors may agree to continue trading with the company, albeit under different payment terms such as pro-forma invoices or cash-on-delivery
How does the process work?
The timescale from initial contact with an insolvency practitioner to agreement of a CVA is 6-8 weeks on average. Once an IP has been appointed, it usually takes around 4 weeks to produce and post the final draft to creditors.
Here is a general outline of the CVA process:
- A licensed insolvency practitioner is approached - they will assess the company situation and decide whether a CVA is the most appropriate solution, keeping both business and creditors in mind. Begbies Traynor has many years’ experience of dealing with company insolvencies. We can review your company situation and quickly offer professional advice
- If recommended by the IP, a CVA proposal is drafted following a detailed review of the company, its liabilities and assets as well as creditors and debts. The company directors may agree its terms or request amendments, but the IP must be satisfied that any final proposal has a reasonable chance of success before proceeding
- Upon agreement the final proposal is filed at court, given a legal originating number, printed, and then copies distributed to creditors
- The IP arranges separate meetings for creditors and shareholders not less than three weeks following the distribution of the CVA
- The creditors’ meeting provides an opportunity to question the terms of the CVA, although some creditors choose to send a representative rather than attending themselves. Others prefer to vote by post or fax their acceptance or rejection of the proposal
- The proposal is approved if 75% or more of the creditors (by debt value), vote in favour of the CVA, including postal and proxy votes
- A vote is also taken at the shareholders’ meeting, with a majority of 50% or more (by debt value) required for the CVA to be approved
- The IP chairs each meeting, and on successful approval issues a report to the court and all creditors within four days. The report details the outcome of each meeting - who was there, plus the results of each vote
- The CVA takes effect as from the date of the creditors’ meeting - no action can then be taken against the company by its creditors unless there is a default, in which case it will probably result in the compulsory liquidation of the company.
As licensed insolvency practitioners, we can help to ensure that the repayment model is viable. We have worked with thousands of distressed companies and we understand that being pursued for unpaid debts is a hugely stressful time and equally recognise that creditors simply want to be paid.
So, if your business is potentially viable but struggling with cash-flow problems or facing threats from creditors such as demands or even a winding-up petition, a Company Voluntary Arrangement could help bring an end to creditor pressure and revive your company.