A Company Voluntary Arrangement (CVA) is available to companies with unsecured debts. They are available in England and Wales, and may follow Administration.
Generally, the company formally contracts to make agreed contributions to an insolvency practitioner who distributes it among the creditors.
A CVA, most typically, lasts up to five years and is a viable option for companies with historic debt problems, or one-off unforeseen causes of debt.
A CVA may be viable for companies where their product or service is selling well but the historic creditor debt is impacting cash flow.
If the company struggles with its agreed contributions during a CVA, it is possible to vary the agreed amounts as long as the requisite percentage of the creditors approve.
Prior to the commencement of a CVA, a company can apply for a moratorium to protect from legal action, and so Winding up Petitions cannot be issued against the company.
Creditors cannot recover interest or historical debts after the date of CVA approval and, once concluded, outstanding debts (including HMRC liabilities) will be written off.
If the company complies with the terms and agreements of the CVA, it may be saved as a result.
What happens during a Company Voluntary Arrangement?
Once company directors decide to proceed with a CVA, a proposal will need to be drawn up for creditors and shareholders to consider.
This proposal is constructed by turnaround practitioners or an insolvency practitioner and must detail, inter alia, the following:
Next, the company must decide whether to apply to the court for a moratorium. Though the benefits of this include legal protection, moratoriums are difficult to supervise and consequently are rarely used.
It is advised to informally talk to unsecured creditors about the potential for a CVA. The company will continue to trade and thereby employees may be able to avoid mass redundancy.
A creditor meeting will be called – creditors and shareholders must have a minimum of 14 days’ clear notice before this meeting.
They will vote to approve the CVA proposal with at least 75% of voting creditors needing to agree to the CVA in order for it to proceed.
A second creditor vote excluding the vote of “connected creditors” will then take place.
“Connected creditors” may be associated companies, company directors or staff who have given unsecured financial aid to the company, or their relatives.
At least 50% of “unconnected creditors” must approve the CVA proposal in order for it to go ahead.
If approved, the CVA will commence. Usually, contributions are paid monthly and distributed to creditors annually by the insolvency practitioner (the supervisor of the CVA).
If the agreed contributions cannot continue to be paid, the company will probably have to consider voluntary liquidation or the supervisor will place the company into compulsory liquidation.
The flexibility that a CVA can provide depends upon approval by the creditors.
For the first 6 -12 months of the CVA, new credit lines will be hard to achieve.
The company will probably have to build trust with suppliers and might need to pay on a cash-on-delivery or pro-forma invoice basis.
The fact that the company has had to use a CVA means something isn’t working in the business plan and this must be addressed for the sake of the company’s future.
The business model must be altered so the company avoids making the same mistakes again.
The CVA will be recorded on the company’s credit file and at Companies House.
This means companies working with you will see you have entered a CVA and might feel you represent a financial risk.
This is probably one of the most serious and overlooked disadvantages to a CVA.
A CVA suits firms where their product or service is selling well but the creditor debt is impacting cash flow.
It enables the company to avoid liquidation, improve cash flow and ease creditor pressure.
Hudson Weir are an established firm of Insolvency Practitioners who specialise in business recovery and corporate financial solutions. Hudson Weir provides industry leading, nationwide services for its clients with the intention of easing financial pressures and providing recovery strategies for struggling businesses.More about us
Hudson Weir Ltd (Company number 09477593) is a company registered in England and Wales.