A Company Voluntary Arrangement is a legal agreement which allows an insolvent company to settle debts by paying a portion of what is owed to creditors over a fixed period of time.
Specifically, a CVA works as follows:
It is proposed by the directors of the insolvent company as an alternative to administration or liquidation.
It allows the company to restructure and write off part of its debts while continuing to trade.
It is overseen by a licensed insolvency practitioner who acts as the supervisor.
Creditors vote on whether to accept the CVA proposal; if 75% or more of creditors (by value of debt) approve, it becomes binding on all creditors.
The company makes periodic payments to creditors from future profits/income based on the terms of the approved CVA over a set timeframe, usually 3-5 years.
Creditors receive a portion of what they are owed rather than having to pursue the company’s assets if it was liquidated.
If you’re exploring the possibility of a CVA for your business, we encourage you to consult with the professional team at Company Debt. Our experts can provide you with tailored advice, ensuring you make informed decisions that align with your company’s long-term objectives and financial health.
Is Your Company Eligible for a CVA?
As it’s an insolvency process, a company must be insolvent or contingently insolvent to be able to implement a CVA. You should also consider the following key eligibility criteria:
The business must either be unable to pay its debts as they fall due or have liabilities that exceed its assets.
At least 75% by value of the creditors who vote must approve the proposal.
The CVA must offer a better outcome for creditors than liquidation.
A licensed insolvency practitioner must oversee the CVA.
CVAs are applicable to limited companies, limited liability partnerships (LLPs), and other corporate structures. Similar arrangements, known as Individual Voluntary Arrangements (IVAs), are available for sole traders and partnerships.
What are the Pros & Cons of a CVA?
Pros
CVAs act as a legally binding agreement for all creditors.
Allows settlement of historic debt over a set period, often at a reduced amount.
The company remains under the control of existing management and continues in its current form.
CVAs enable existing contracts to be retained.
Less public than liquidation or administration.
Can help retain jobs.
Cons:
Negatively affects your business’s credit rating.
CVAs can be a lengthy process with a fixed term for monthly payments, usually lasting a few years.
Risk of rejection by creditors and/or shareholders.
There is no guarantee of viability post-CVA, with the potential for future liquidation or administration.
Possible undesirable terms enforced by creditors or CVA advisor, such as dropping contracts or making redundancies.
What’s the CVA Process?
Initial Consultation and Assessment
A company interested in a CVA starts by consulting a licensed insolvency practitioner (IP). The IP evaluates the company’s finances to see if a CVA makes sense.
Preparing the CVA Proposal
With the IP’s help, the company prepares a proposal explaining its financial status, problems faced, and how it plans to pay back creditors. This includes a business restructuring plan.
Nominee’s Report
The IP, now acting as a ‘nominee’, writes a report for the court, assessing the CVA’s chances of success and advising whether creditors should consider it.
Creditors’ Meeting
Creditors review the proposal and the nominee’s report before voting on the CVA. They can vote in person, by proxy, or by post.
Approval of the CVA
The CVA needs at least 75% of voting creditors (by debt value) to say yes. This count excludes votes from insiders like employees or directors.
Implementation and Supervision
Once approved, the IP oversees the CVA, ensuring the company makes the agreed payments to creditors and follows the CVA’s terms.
CVA Comes to an End
If the company fulfils the CVA’s conditions, it’s completed, and the remaining debt is usually forgiven. The company then operates debt-free.
How Long Does a CVA Take?
Typically, it takes between 8 and 10 weeks to enter into a CVA, from appointing the insolvency practitioner to a successful creditor vote, on average.
How Much Does a CVA Cost to Propose?
Typical CVA nominee fees range from £5000 to £10000. The cost of supervising the arrangement will be decided by the creditors and depends on the company’s specific circumstances.
It’s important to discuss and agree upon these fees with the IP before proceeding, as they will be part of the overall financial arrangement and can impact the feasibility of the CVA for the business.
How Does a CVA Affect Directors?
During a Company Voluntary Arrangement (CVA), directors of insolvent companies must continue to manage the company, but with added responsibilities. They are required to act in the best interests of their creditors, prioritising creditor repayments above all else. An insolvency practitioner (IP) oversees this process, monitoring the directors’ actions to ensure compliance with these obligations.
In exceptional circumstances, if creditors lose confidence in the current directors’ ability to lead the company back to profitability or have concerns regarding past management decisions, they might request a change in management as part of the CVA terms.
Will HMRC Accept a CVA?
Yes, HMRC will accept a CVA if they believe that it is in the best interests of the company and its creditors.
HMRC has published a set of criteria that it considers when evaluating CVAs, which can be found here: https://www.gov.uk/company-voluntary-arrangements
How Does a CVA Affect Employees?
While the primary goal of a CVA is to keep the company operational with minimal disruption to employees, restructuring may necessitate redundancies. Should employees be made redundant as part of a CVA, they remain entitled to redundancy pay, assuming they meet the qualifying criteria.
What Happens after a Company Voluntary Arrangement?
The final outcome of a CVA will ideally be the company’s return to operational and financial health, following strict adherence to the agreed repayment plan. Once the CVA terms are fully met, remaining debts are typically written off, freeing the company from those financial obligations.
CVA Advice
Given that creditors may or may not agree to a CVA, it is essential, if you think this is the best option, to put together the best possible proposal and to be in a position to reassure creditors who have likely lost trust and/or are angry. The best way to achieve these goals is by having the right IP on your side.
Please contact us to discuss your situation and decide whether we can help you.
Frequently Asked Questions about CVAs
How can I ensure creditors approve our CVA proposal?
Crafting a compelling CVA proposal is critical for gaining creditor approval. This involves presenting a clear, realistic plan for repayment and business restructuring that demonstrates your company’s potential for recovery. Engaging an experienced insolvency practitioner (IP) can significantly enhance your proposal’s credibility and your ability to negotiate terms that are acceptable to both your business and the creditors.
What if our CVA proposal is rejected by creditors?
If your CVA proposal is rejected, it’s important to consult with your IP about alternative options. These might include renegotiating terms with creditors, exploring other forms of insolvency arrangements, or considering business restructuring outside of formal insolvency procedures. Each situation is unique, so tailored advice from your IP is essential.
How does a CVA impact our relationship with secured creditors?
While a CVA is primarily concerned with unsecured debts, the impact on secured creditors depends on the specific terms of the arrangement and any negotiations that take place. Generally, secured creditors retain their rights unless they agree to specific modifications as part of the CVA.
Can we undertake new business contracts during a CVA?
Yes, you can enter into new business contracts while under a CVA, provided these activities align with the overall goal of returning the company to profitability and do not contravene any terms of the CVA. It’s crucial to maintain transparent communication with your IP and, if necessary, seek approval for significant decisions that could affect the CVA’s success.
How do we choose the right IP for our CVA?
Selecting the right IP is crucial for the success of your CVA. Look for professionals with experience in your industry and a track record of successful CVA negotiations. It’s also beneficial to choose an IP who communicates clearly and is proactive in their approach to managing the CVA process.
What happens if we fail to meet the terms of our CVA?
Failing to meet the terms of your CVA can lead to its termination, which may result in creditors taking legal action to recover outstanding debts, potentially leading to liquidation. If you anticipate difficulties meeting CVA terms, it’s important to communicate early with your IP to explore possible adjustments to the arrangement or alternative solutions.
