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 representing 75% or more in value 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 payment 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.
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.
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 can take around 4 weeks to produce, file in court, and post the final CVA proposal to creditors
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.