What is a Company Voluntary Arrangement (CVA)?

What is a CVA?

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.

One of the distinct advantages of a CVA is that it permits the company’s directors to maintain control over the business operations, setting it apart from administration or liquidation processes where external administrators may take over. The arrangement is overseen by a licensed insolvency practitioner, who plays a critical role in ensuring that the company complies with the agreement’s terms and coordinates the distribution of payments to creditors.

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, the company must be insolvent or contingently insolvent to be able to implement a CVA. The key eligibility criteria include:

• The business must either be unable to pay its debts as they fall due or have liabilities that exceed its assets.
• For a CVA to proceed, at least 75% by value of the creditors who vote must approve the proposal. This majority is calculated from those creditors who actively participate in the vote.
• The CVA must present a viable and realistic plan, demonstrating that it offers a better outcome for creditors than liquidation.
• A licensed insolvency practitioner must be appointed to 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.
• Although not always necessary, court approval may be sought for a CVA, especially in cases where the arrangement is contested by creditors or shareholders.

What are the Pros & Cons of a CVA?

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.

Proposal Development

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.

Completion

If the company fulfills the CVA’s conditions, it’s completed, and the remaining debt is usually forgiven. The company then operates debt-free.

Directors maintain control during the CVA but must stick to the agreed terms to avoid liquidation.

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 specific circumstances of the company. 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. This involves careful management and decision-making to ensure that the company adheres to the repayment plan outlined in the CVA. 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. Since a CVA is considered an insolvency event by the UK government, the government will cover the cost of redundancy pay, relieving the company of this financial burden.

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