If you find your business in a state of insolvency, exposed to continual pressure from creditors, it may be time to consider a Company Voluntary Arrangement (CVA). You can keep trading while ensuring your creditors are reasonably repaid over time. But there is a lot to understand. Therefore, this guide provides critical information about CVA and the process involved.
What is a CVA?
A Company Voluntary Arrangement (CVA) is a legally-binding agreement with your company’s creditors to allow some of your debts to be paid back over time. The main focus of a CVA is to preserve a company which is at risk of insolvency by rebuilding sales and profits. It also ensures creditors get what you owe them over time. They may also include a deal to sell assets and pay creditors back from the proceeds.
Since it is a formal process, and as it is legally binding, the acceptance of a CVA is based on a vote passed by the majority of creditors – greater than 75% of those voting on the proposal. If this is the case, all creditors are then legally bound to accept its terms, including those who didn’t vote, did not receive notice of the meeting, or voted against it.
CVAs are fairly common among businesses as an insolvency solution. It is also common for companies to propose them if they are struggling with debt but are still a viable business. If directors want to maintain control of the company and stop the company struggling, it is often a very suitable solution.
What are the benefits of a CVA?
CVAs are common due to the benefits they can give to companies, directors, and creditors. They can:
- Quickly improve cash flow
- Cease pressure from tax, VAT, and PAYE
- Cut costs
- Sometimes allow for employment and lease terminations with no cash cost
- Often be cheaper than other insolvency solutions as they don’t involve court (unless challenged)
- Avoid being publicly advertised
- Prevent a winding-up petition from taking effect
- Offer assurance to creditors that a proportion of debt will be repaid
Creditors may agree to continue trading with the company, often under different circumstances such as pro-forma invoices or cash-on-delivery
Who can propose a CVA?
The directors of the company can propose a CVA. In a situation when the company is in liquidation or administration, the liquidator or administration can propose it as an alternative. To be eligible for a CVA, the business must be insolvent or contingently insolvent. However, the appointed insolvency practitioner (IP) should also be content that the company is a ‘going concern’ under normal circumstance.
Therefore, to enter a CVA, you’ll need cash flow forecasts to show the business’s ability to meet the terms of the arrangement. There need to be clear, accurate financial reporting systems to ensure the smooth running of the process. Licensed insolvency practitioners can help in this situation to make sure everything is in order.
Eligibility for a CVA
Although a company must be regarded as insolvent, the appointed insolvency practitioner should be satisfied that the business is a ‘going concern’ operating under fundamentally sound practices.
Projected cash flow forecasts will be required as evidence of the company’s ability to meet CVA terms, with clear and accurate financial reporting systems being beneficial to the smooth running of the process.
Irwin Insolvency can help company directors in this situation. We have licensed insolvency practitioners with a wealth of experience in all industries.
The Company Voluntary Arrangement (CVA) Process
On average, it takes six to eight weeks for a CVA to be agreed upon from initial contact with an insolvency practitioner. Once the insolvency practitioner has been appointed, it takes approximately four weeks to produce and post the final draft to creditors.
Step by Step
- You approach a licensed insolvency practitioner to assess your company’s situation and consider whether a CVA is the most viable solution. Both the business’s and creditors’ situations are kept in mind when making this decision. Licensed insolvency practitioners will provide quick and impactful professional advice to make the process as simple as possible.
- If the insolvency practitioner recommends a CVA, they will create a proposal after carrying out a detailed review of the business, its liabilities, its assets, the creditors, and the debts. Directors can agree the proposed terms and suggest amendments. However, the final proposal must assure the insolvency practitioner that there is a good chance of success before proceeding to the next stage.
- The finished and agreed draft of the proposal is filed at court, given a legal originating number, then printed with the copies being distributed among creditors.
- The insolvency practitioner will then arrange meetings for creditors, as well as shareholders, after three weeks since the distribution of the CVA.
- In creditor meetings, there is the opportunity to question the terms of the arrangement, and vote. Creditors do not have to vote in person. They can also vote by post, detailing whether they accept or reject the proposal.
- If 75% or more of the creditors accept the proposal and vote in favour, it is approved.
- A vote between shareholders is also undertaken, where a majority of 50% or more (by debt value) is required for it to be approved.
- On successful approval, the insolvency practitioner will report this to the court and all creditors within four days. The issued report details the outcome of all meetings, attendance, and the result of each vote.
- From the day of the creditor’s meeting, the CVA takes full effect. From this time forward, creditors cannot take action against the company, unless there is a default which will likely result in compulsory liquidation.
If either the shareholders or creditors reject your CVA proposal, you will need to consider alternative insolvency solutions. Your company can enter into administration even if the proposal to enter into a CVA is rejected. Other insolvency solutions include:
- Pre-pack administration – This lets your company sell some of its assets to a new company to repay creditors through the use of an insolvency practitioner. You can start a new company with the assets your old company spent years developing, but you and other company directors will need to purchase them for market value.
- Liquidation – Selling off your company’s assets to raise funds to repay creditors. Liquidation always results in the closure of your company and the end of its trading.
In the case that a CVA is approved, company debts are restructured based on the proposal. You can start to move towards recovery, changing the way you operate to get your cash flow back in order. This may involve:
- Terminating unprofitable/unhelpful contracts
- Terminating leases and agreements
- Making members of staff redundant
Insolvency practitioners can often help you do this at no cost. When your CVA is active, your company must comply with its terms if you want to maintain protection from creditors. You may need to make regular payments to creditors for several years to complete the agreement. If you miss a payment or fail to comply with its terms, there are a few potential outcomes:
- Creditors file a winding-up petition against your company and attempt to put you into liquidation.
- It is modified to reduce the monthly payments and give more time to pay off creditors.
Most CVAs are designed to provide realistic opportunities for your company to recover, with payment plans that do not strain your cash flow or prevent business as usual, so it is not expected that payment will be missed.
How much does a CVA cost?
Before the CVA is proposed, a statement of affairs is produced including analysis of the company’s current financial situation. Trading projections for the next 12 months are also needed. Fees for these documents are often charged upfront and the amount charged usually ranges between £2000 and £5000. The cost does depend totally on the number of creditors, employees, the bank’s position, and the level of negotiation that is needed. Eventually, a company voluntary arrangement (CVA) is a deal and doing such a deal involves talking to the people and the stakeholders in the business.
There is a Nominee Fee made by the Insolvency Practitioner (IP) for drafting the proposal and negotiating its agreement. This fee will vary depending on the nature of the arrangement and the insolvency practitioner. However this fee is taken from the agreed payments that the company makes.
Supervisory Fees are charged by the insolvency practitioner (IP) every year that the agreement is in place. These fees are for the work the insolvency practitioner has to undertake and manage around your CVA, so costs vary, but they will be made clear in the CVA proposal documents.
FAQs on Company Voluntary Arrangement (CVA)
Q. Will we lose our customers?
A. You will not. As long as you are delivering your products and services on time and to high quality, it is rare for customers to walk away.
Q. Should we tell our customers we are entering a CVA?
A. This decision is up to you as it should be based on knowledge of the company-client relationship, their requirements, and contracts. If you do tell them, sometimes it is best to have a CVA advisor in attendance to dispel myths that you have ‘gone bust’.
Q. Will our staff walk out?
A. This is unlikely as staff who walk out on your business lose their employment rights and will not receive any redundancy, in-lieu-of-notice payments from the company, or DiSB. For many, walking out means financial hardship. They will also not be eligible for Jobseeker’s Allowance. Being open and honest with your employees about your plans may, therefore, be most beneficial to your company.
Q. Why choose a CVA over liquidation?
A. If a return to profitability is possible with a little restructuring or cash injection, CVA may be recommended over a voluntary liquidation.
The arguments to save a viable company involve:
- Preservation of goodwill
- Preservation of tax losses
- Avoiding the costs of liquidation
- Avoiding an increase in creditor claims
- Stopping the value of assets plummeting
- A legal and moral obligation to maximise your creditor interests.
If you go into liquidation to avoid paying creditors, you can be disqualified as a company director, be made personally liable, and be pursued for misfeasance or wrongful trading.
Hopefully, this guide has made the process of entering a Company Voluntary Arrangement (CVA) much more straightforward and highlighted its potential use as a way to avoid dissolution. CVAs are a common strategy for businesses that want to continue trading but are overburdened with debt. However, with the help of experienced insolvency practitioners, this can be turned around.
Between 25 December 2018 and 25 March 2019, around 93 companies entered a company voluntary arrangement as a way to restructure their debts and survive.
Irwin Insolvency is one of the largest business recovery practice in the UK serving businesses nationwide. If you need more information on Company Voluntary Arrangement, get in touch with our licensed practitioners at Irwin Insolvency today by calling 0800 009 3173 or emailing us at firstname.lastname@example.org. We have extensive experience in bringing struggling businesses in the UK back from the brink, so don’t hesitate. Contact one of our expert insolvency practitioners to arrange a consultation.