Company Voluntary Arrangements Find out more about how a CVA could help your business
A Company Voluntary Arrangement or CVA is an insolvency procedure that allows companies with debt problems to reach an agreement with lenders and creditors to make repayment achievable. Often, a company will be able to write off part of its debt in an attempt to make repayments more achievable over an agreed period of time. A Company Voluntary Arrangement must be agreed upon by all of the companies directors and the administrator or liquidator of the company.
A CVA must be implemented by an insolvency practitioner who will put together a proposal for creditors to see if it is acceptable. In order for it to be accepted, 75% of the creditors must agree to it, the 75% is determined by debt value, not by the number of creditors owed. For example, if a company owes £100,000 and £75,000 of that is owed to one creditor then it would only require the approval of that creditor. If however the £100,000 is owed to 10 creditors with an even £10,000 to each, it would require 8 of the creditors to agree to the Company Voluntary Arrangement.
Once the CVA has been agreed, a single monthly repayment will be made to your insolvency practitioner who will distribute the fund to relevant creditors for you. Applicable fees for the CVA will be deducted by your insolvency practitioner from the monthly amount you pay to them, companies aren’t required to pay any further costs. When a company enters in to a Company Voluntary Arrangement a record of this is made on its credit file and it will be registered at Companies House so that any other businesses potentially entering in to an agreement with you are full aware.
One of the best things about a CVA and the reason why it is always better to enter in to one if at all possible is that you can apply for a CVA moratorium. This is an application that can be made to a court to stop creditor pressure i.e. they will not be able to commence legal action against you or the company and bailiffs are unable to attend your premises so it gives breathing space whilst you are paying back your debts. CVA moratoriums can be difficult to obtain and are something you should speak to your insolvency practitioner about before the CVA is finalised.
What types of debt can be included in a CVA
There are a number of different options available to you when considering an IVA, and these can be discussed with you during an initial call which should centre around which IVA option is best suited to your circumstances. The three types are as follows:
Can be included in a CVA
Cannot be included in a CVA
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What is a Company Voluntary Arrangement (CVA)?
A Company Voluntary Arrangement, often abbreviated as CVA, is a legally binding agreement between a financially distressed company and its creditors. This arrangement outlines a structured plan for the company to repay its outstanding debts over a fixed period. The primary objective of a CVA is to rescue the business from insolvency while allowing it to continue trading and addressing its financial challenges.
In essence, a CVA provides a structured framework for a struggling company to negotiate with its creditors, aiming to strike a balance between the interests of both parties. This process offers a lifeline to businesses that might otherwise face the prospect of liquidation and closure.
How Does a CVA Work?
A CVA follows a well-defined process, starting with an initial assessment of the company’s financial situation and culminating in the successful implementation of a debt restructuring plan. Here’s a simplified overview of the key steps involved in a CVA:
Assessment and Proposal: The process typically begins with the company seeking professional advice from licensed insolvency practitioners. These experts assess the company’s financial health and determine whether a CVA is a viable solution.
Proposal Development: If a CVA is deemed suitable, a formal proposal is drafted. This proposal outlines how the company intends to repay its debts, often with reduced monthly payments and extended repayment terms. It also includes a detailed explanation of how the arrangement will benefit creditors.
Creditors’ Meeting: Once the proposal is ready, a creditors’ meeting is convened. Creditors, including banks, suppliers, and other stakeholders, are invited to vote on whether to accept or reject the proposed CVA. For the CVA to proceed, it must receive approval from at least 75% of creditors (by value) who participate in the vote.
Implementation: Upon successful approval, the CVA is implemented, and the company begins making regular payments to its creditors as per the agreed terms. This typically involves a single, consolidated payment that simplifies financial management for the company.
Monitoring and Reporting: Throughout the CVA period, an insolvency practitioner oversees the process, ensuring that the company adheres to the agreed-upon terms and reports on the progress to creditors.
Key Benefits of a CVA
A Company Voluntary Arrangement offers several notable advantages for both struggling businesses and their creditors:
Debt Repayment on Customized Terms: Through a CVA, a company can negotiate more favorable debt repayment terms, often resulting in reduced monthly payments and extended repayment periods.
Protection from Legal Action: Once a CVA is in place, the company gains legal protection from creditors pursuing aggressive legal actions, such as winding-up petitions or asset seizures.
Business Continuity: Unlike liquidation, a CVA allows the company to continue operating and trading while addressing its financial challenges. This is crucial for preserving brand reputation, retaining employees, and maintaining customer trust.
Simplified Debt Management: By consolidating all debts into a single, manageable repayment plan, a CVA simplifies financial management and reduces administrative burdens for the struggling company.
Avoidance of Insolvency: A successfully implemented CVA enables a company to avoid the dire consequences of insolvency, including the potential for business closure.
Who is a Company Voluntary Arrangement suitable for?
To determine if a CVA is suitable for you or your business, consider the following factors:
Financial Distress: CVAs are typically suitable for companies facing financial distress. This may include businesses struggling to meet their financial obligations, facing threats of legal action from creditors, or experiencing cash flow problems.
Legally Registered Companies: CVAs are available primarily to legally registered companies, including limited companies and limited liability partnerships (LLPs). Sole traders and individuals may explore alternative debt relief options.
Solvency Concerns: A CVA is ideal for businesses that are insolvent but have the potential for recovery. If your company is viable in the long term and has a genuine chance of returning to profitability, a CVA can help by restructuring your debts and providing a pathway for recovery.
Creditors’ Cooperation: Successful CVAs require the cooperation of creditors. If your creditors are open to negotiation and willing to work towards a mutually beneficial solution, a CVA becomes a viable option.
Ability to Make Regular Payments: The proposed CVA repayment plan involves making regular payments to creditors over a specified period. It’s crucial that your company has the capacity to meet these payments while maintaining essential business operations.
A Commitment to Change: A CVA often involves changes in business practices and financial management. Companies seeking a CVA should be committed to implementing these changes to ensure long-term financial stability.
Avoidance of Liquidation: If the desire is to avoid the dire consequences of liquidation, such as business closure and job losses, a CVA can provide a lifeline by allowing the company to continue trading and restructuring its financial affairs.
Frequently Asked Questions Find out more about Company Voluntary Arrangements
Once this has been completed your insolvency practitioner will write to your creditors and present them with the proposal, they will then be invited to vote on it and the CVA will be approved if 75% of the creditors agree. It is important to understand that the 75% is by debt value and not the number of creditors, so if 90% of your debt is with one creditor they will have the final say on it.
If three quarters of those of those creditors do not agree to the CVA then your company could face voluntary liquidation. It is also extremely important to understand that if you do not stick to your agreed payment schedule (should the CVA be approved) then any of your creditors can apply to wind up your business.
Whilst somebody can check on companies house if you have a CVA, a major benefit is that there is no requirement for you to tell customers about your company voluntary arrangement. There is no need to disclose it in correspondence and is classed as private matter between you and your creditors. You can also be rest assured that you won’t get unwanted visits from bailiffs, payment demands and winding up petition cannot be instigated.
Finally, there won’t be any investigation in directors’ conduct and any directors current account that are overdrawn won’t be called in. It will be allowed to be repaid at a reasonable rate.
This isn’t so much of a disadvantage but more something to take in to consideration, whilst a CVA covers your unsecured debts, it doesn’t cover your secured debts so a bank for example isn’t covered by a CVA and they could call in administrators still even if you are sticking to your agreed CVA repayments. Finally, it’s important to understand that if your company voluntary arrangement fails for some reason then creditors can take legal action against the company so it is essential to make sure the proposed CVA is something that you can stick to and is feasible over the medium term of the business.