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What is a CVA?

In short, CVA stands for Company Voluntary Arrangement which is where a company comes to an agreement with its creditors to repay them over a longer period of time. This gives the company breathing space to continue to trade whilst repaying its debt. Usually the repayments to creditors under a CVA are between 36 and 60 months. In most cases, the creditors in the CVA agree to a reduced percentage of their original debt being repaid. Its sole purpose is to rescue the business and make it viable again whilst being in the best interests of its creditors.

Why do creditors accept CVA’s

If a creditor was not to support a CVA then usually, the only other option for the Directors is to liquidate the company.  When a company enters liquidation, the creditors usually receive very little or no repayment of what they are owed. In order for a CVA to be put forward, an Insolvency Practitioner must be of the opinion that;

• The details in the proposal are not materially different than the company’s financial position
• The CVA has a reasonable chance of being approved and implemented
• That it is not manifestly unfair

In order for the CVA to be approved, 75% of creditors must accept the proposal being put forward. Once approved, the CVA holds all creditors under a legally binding agreement which includes creditors that voted against the CVA.

When is a CVA applicable?

Sometimes due to an unavoidable occurrence, an otherwise profitable business may find themselves unable to afford to pay its liabilities as and when they fall due and it wants to avoid liquidation. Usually, the company will have good relationships with its suppliers but may need to restructure or make changes to the way it operates. Has profitable orders but lacks cash flow due to late payers and bad debts. In these instances, a CVA allows the company time to overcome these issues and make the changes it needs to become viable once again.

The company must provide a cash flow forecast showing the income and outgoings and identifying the amount of funds available to creditors whilst also showing that it can continue to pay its ongoing liabilities. If creditors do not believe that the company can maintain payments under the CVA whilst also continuing to trade successfully then they may not accept the proposal.

What is the process of implementing a CVA?

The procedure is usually initiated by the Directors of the business who then instruct an Insolvency Practitioner, creditors or shareholders cannot start the process.

The Directors, with the assistance of the Insolvency Practitioner, create the CVA proposal which sets out the terms that the company is asking its creditors to accept. The main structure of the proposal is what the payments level will be and the terms of repayments. Within 28 days of the Insolvency Practitioner receiving the proposal, he must submit a report to the court confirming that he believes that a meeting of shareholders and creditors should be held.

Once filed in court, the proposal is issued to Shareholders and creditors and 50% of shareholders and 75% of creditors must vote in favour of the proposal for it to be accepted. The creditors may ask for the proposal to be modified prior to them accepting it. This must be agreed by the company and creditor prior to the proposal being approved,

Advantages of a CVA

• Directors to remain in control of the company
• No investigation into the Directors conduct
• Structured repayment of the company debt
• Shareholders to retain their stake in the company
• Legally binds the creditors to the agreement
• If implemented successfully, guarantees a return to the creditors.

Disadvantages of a CVA

• There is no guarantee that your creditors will accept the proposal
• If the repayment schedule is not maintained it could still end in the company being liquidated
• It does have a negative effect on the company’s credit rating.

If you feel that there is still value within your business, entering a CVA could give you the breathing space you require, do not hesitate in contacting us today for free advice on 0800 0465 600.