What is a Company Voluntary Arrangement (CVA)?April 21, 2020
Mike’s restaurant opened last year and has really struggled to hit the ground running. Extortionate rent, a highly competitive area, and a lack of advertising started to take a toll on both the company’s financial position and his own emotional well-being.
Just as Mike thought he couldn’t have any more bad luck, he was hit with the damaging effect of restaurant closures as a result of the Coronavirus pandemic.
Although the job retention scheme was helping to pay staff, there were a number of ongoing overheads that were adding to the company’s growing debts. His mind was at sixes and sevens - will the business have to go into administration or even worse, would he have to resort to liquidation?
Mike researched his options online which led to him getting in touch with a licensed insolvency practitioner (IP). Mike was advised to apply for a Company Voluntary Arrangement (CVA).
A CVA would give him some breathing space in regards to paying back the debt he owed to creditors. Mike felt that applying for a CVA was the best solution moving forward.
This article will give you an insight into what a company voluntary arrangement is and how the process works. We’ll also go over the relevant costs and the main advantages and disadvantages associated with a CVA.
What is a Company Voluntary Arrangement (CVA)?
A company voluntary arrangement is a business rescue tool designed for insolvent limited companies. The process was introduced in 1986 and is one of the Government's preferred rescue options.
Similar to an Individual Voluntary Arrangement (IVA), a CVA is a legally binding agreement with your company’s creditors which must be implemented by a licensed insolvency practitioner.
A CVA allows your business to repay its debts to creditors over a fixed period of time, as long as 75% (debt value) of your creditors vote in favour of the proposal. The proposal is drafted by an insolvency practitioner and pitched at a meeting of creditors where the CVA is either accepted or rejected.
If the proposal is approved, all unsecured creditors are bound to the arrangement. This means the company can continue to trade throughout the duration of the CVA, and that the company’s director(s) remains in control.
Creditors are also prohibited from taking any further legal action against the company as long as terms are adhered to, and existing legal action such as a winding-up petition ceases.
The CVA usually lasts for 3-5 years and is constantly monitored by a supervisor who must be a licensed insolvency practitioner. During the CVA, monthly payments are made to your insolvency practitioner, whose fees are included in these payments. Apart from the fixed monthly installments, your company will not be required to pay any further costs (except an upfront cost for the creditor’s meeting where the vote on your proposal is cast).
A CVA is the go-to business recovery tool for companies that are deemed viable, but struggling to shake off historic debt. Essentially, the CVA places a legal forcefield, called a moratorium, around the company to stop creditors coming after the business.
An Overview of the CVA Process
If your business is looking to apply for a CVA, there’s a certain procedure that must be followed to ensure that everything goes smoothly for all parties involved.
We have provided a chronological process of what to expect from a CVA below:
- Make contact with an Insolvency Practitioner (IP) - The company in need of financial help makes contact with an IP with whom the company’s financial situation is discussed to decide whether a CVA is the right course of action. At 180 Advisory Solutions, we provide free consultations for all businesses looking for expert advice and guidance relating to CVAs.
- Gathering information - If a CVA is recommended by the IP, a CVA proposal is drafted. The proposal includes details such as: how the financial difficulty came about, up-to-date information regarding the company’s financial position including its liabilities and assets, how much the company can afford to pay on a monthly basis, as well as the predicted duration of the CVA.
- Proposal Agreement - Once the proposal has been drafted and approved by the company director(s), a copy is sent out to all creditors and shareholders.
- Creditor’s Meeting - A minimum of 14 days notice should be given to creditors and shareholders before holding the meeting. The meeting provides a chance for creditors to question the terms of the CVA. It’s not mandatory for a creditor to attend the meeting in person, with some preferring to send representatives or vote via a proxy such as post or email.
- Approval of Proposal Part 1 - The proposal is approved if 75% or more of the unsecured creditors vote in favour of the proposal. If it's not accepted, the proposal will need to be revised and resubmitted for approval or your company could face voluntary liquidation.
- Approval of Proposal Part 2 - There will also be a second creditors meeting where connected unsecured creditors are excluded from the vote. A connected creditor could be a director or employee that’s owed money from the company. At this meeting, 50% of creditors will need to be in favour of the proposal to approve the CVA.
- Approval of Proposal Part 3 - A vote is also conducted at the shareholders meeting, with a 50% approval rate needed to pass the proposal.
- Upon Successful Approval - The IP issues a report to the court and all creditors within four days. The report contains the outcome of the vote and lists the parties involved.
- The start of the CVA - The CVA begins as of the date it is approved by the creditors and shareholders. The IP will collect monthly instalments from the business and distribute shares to creditors on a pro-rata basis. No legal action can be taken against the business by creditors, putting an end to creditor pressure. If monthly instalments cannot be met, the company will likely go into compulsory liquidation.
- The end of the CVA - The CVA will normally finish at the date agreed on in the proposal. That is, of course, if all payments have been made and conditions adhered to. If there is outstanding debt at the end of the CVA period, this will likely be written off, or in some cases, the CVA can be extended.
Eligibility for a CVA
In addition to your company being classed as insolvent, your IP must also be assured that the business is viable going forward and operating under financially sound practices.
The director(s) are required to provide evidence of the company’s ability to meet CVA terms and conditions. This involves producing projected cash flow forecasts and transparent financial reporting systems.
This is where our licensed insolvency practitioners at 180 Advisory Solutions can help. We help company directors every step of the way through the CVA process.
Advantages & Disadvantages of a CVA
A Company Voluntary Arrangement (CVA) offers the chance for businesses to repay their debts in an affordable and hassle-free manner. However, like all insolvency procedures between companies and creditors, there are both pros and cons.
Advantages of a CVA
- Director(s) remain in control - The approval of a CVA ensures that the company director remains in control of the business. A CVA allows you to control the business recovery plan and means you continue to oversee the day-to-day operations of the company.
- Lower Costs - Compared to alternative insolvency procedures such as receivership and liquidation, the costs of setting up a CVA are significantly less. An initial fee is required to set up a creditor’s meeting, but after that all you need to worry about are your monthly installments. This will allow you to budget effectively and reduce cash flow issues.
- Breathing space from creditors - Creditor pressure and all legal action is frozen for the duration of the CVA as long as you adhere to the terms of the proposal. This means no visits from the sheriff officer or winding up orders which is a huge monkey off your back.
- Avoiding Liquidation - Re-paying your creditors in monthly instalments and staying in control of your business is a much better outcome than seeing your company fall into liquidation. Liquidation will almost definitely result in full loss of control and closure of your company.
Disadvantages of a CVA
- Poor Credit Rating - A CVA will go down as a black mark on the company’s credit rating which makes it tricky to obtain credit from banks and suppliers. This can have a knock-on effect on your company’s ability to trade which, in turn, could lead to further debt problems.
- Gaining stakeholder and creditor approval - Getting a licensed IP is only the first step. If you don’t receive a minimum of 50% approval from stakeholders and 75% of creditors (debt value), then you can’t proceed with a CVA. This is why preparing a sound and credible proposal is paramount to the outcome of the vote.
- Lengthy Duration - Signing up for a CVA means you’re in it for the long haul. The length of a CVA can be anywhere between 3-5 years which is a serious financial commitment. Pre-pack administration may be a better option, but this is not always the case.
- Failure to adhere to CVA terms - If for whatever reason, the CVA fails, creditors have every right to take legal action against the company. This could be a result of failing to keep up with payments which is why it's imperative to devise an arrangement that is feasible for the company in the long term.
If you require further guidance on Company Voluntary Arrangements (CVA), please don’t hesitate to get in touch for a free consultation with one of our licensed insolvency practitioners.
We can advise you on your cash flow forecasts, strategic financial planning as well as guarantee that your repayment model is representative of a viable business going forward.
At 180 Advisory Solutions, we prioritise rescuing and restructuring companies so that they can avoid insolvency altogether. We have years of experience in helping SMEs with large company debts or cash flow problems that are dealing with pressure from HMRC and other creditors.