Company Voluntary Arrangement (CVA) with a Moratorium
What Is a CVA?
A company voluntary arrangement (CVA) allows a business in financial difficulty to pay off its debts in a manageable and structured way.
Is a CVA the most appropriate solution for your company? This is determined by a comprehensive review of the business by a licensed insolvency practitioner (IP).
The IP considers all aspects of the business – assets, liabilities, nature of the business and potential for future growth. This information is used by the IP to prepare the CVA proposal, which is then presented to the creditors for their consideration.
For CVA approval, the company must demonstrate it can rebuild sales and profits over time. This is necessary to ensure creditors are repaid and to preserve the company as a viable business – essential criteria for CVA approval.
The CVA must be detailed, clear and achievable, so it takes time for the IP to assess the business thoroughly and prepare the CVA proposal.
What Is the Statutory Moratorium for CVA?
Until the CVA is approved, there is nothing to prevent creditors from starting legal proceedings to recover their debts. Without proper plans in place, this is extremely detrimental to the company.
The company can alleviate the situation by applying for a company voluntary arrangement moratorium. The moratorium is initially in force for 20 working days, but the directors can extend it by another 20 working days at their discretion. This allows the insolvency practitioner and directors sufficient time to work on the CVA proposal.
Benefits of a Company Voluntary Arrangement Moratorium
CVA with a moratorium protects the company for its duration:
It protects the company from legal action from creditors.
Insolvency proceedings are not allowed.
This includes petitions for winding-up orders (which allow compulsory liquidation).
A receiver can’t be appointed, or any request made for administration.
Creditors can’t repossess goods or make any requests to do so.
Landlords cannot seize and sell tenants’ assets under the CRAR procedure (Commercial Rent Arrears Recovery) to recover rent arrears.
Any ongoing litigation must be halted.
No new legal action can be taken during the moratorium.
How Should the Company Use the CVA Moratorium Period?
The company voluntary arrangement moratorium gives a company and its creditors time to find common ground before the CVA proposal is formally presented for debate. This provides a less pressurised environment for negotiation, as there is no possibility of legal action at this point.
During the moratorium, the business is free to continue its daily operations, but this doesn’t provide an excuse to cut corners. The company must still honour its daily financial obligations.
All payments required for the regular daily running of the business must be made at the usual time – staff wages, utility bills, necessary supplies, rent to landlords and so on. Company assets can’t be sold (even those not needed for daily operations), and additional funding can’t be acquired (above £500) without approval from the nominee (who administrates the moratorium).
What Happens When the Moratorium Ends?
It’s important to note that a company voluntary arrangement moratorium doesn’t guarantee that all ends well for the business.
The moratorium can have several possible outcomes.
- The company and creditors agree an informal plan for repayment (less likely).
- A CVA is approved, and a structured, legally binding repayment plan comes into effect.
- The company is considered beyond saving or the creditors reject the CVA proposal for some other reason. The company then goes into liquidation or administration.
Does a CVA Have a Moratorium?
A CVA isn’t automatically preceded by a company voluntary arrangement moratorium. The insolvency practitioner must be satisfied the following criteria are present before the moratorium can come into effect.
- Directors must provide documentation to prove the company is insolvent or will shortly become insolvent.
- The insolvency practitioner must be satisfied the company is viable – with careful management and restructuring it can repay its debts and continue trading successfully in the future.
- The IP must be satisfied the moratorium significantly improves the chances of the CVA proposal being accepted by creditors.
A nominee must oversee the moratorium. This is usually the insolvency practitioner.
CVA With a Moratorium – Reliable Advice from Irwin Insolvency
How will a company voluntary arrangement moratorium benefit your business?
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