A Company Voluntary Arrangement (CVA) is a structured and legally binding agreement that provides financially distressed companies with the opportunity to settle their debts over a predetermined period, typically up to five years, while continuing to operate.

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.

CVAs offer a versatile solution for business recovery, enabling organisations to restructure their financial obligations, enhance cash flow, and potentially circumvent the consequences of more severe insolvency procedures.

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.

CVA

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.

Is your business suitable for a CVA?

Your business’s suitability for a Company Voluntary Arrangement (CVA) primarily hinges on its potential to generate future profits and your ability to gain approval from 75% of your creditors by debt value. The size of your business isn’t a limiting factor; what’s crucial is your capacity to propose a realistic and persuasive recovery and repayment plan. Consulting with a licensed insolvency practitioner can give you a tailored evaluation and guidance on the best steps forward.

Pros & Cons

Pros

  • Acts as a legally binding agreement for all creditors.
  • Allows settlement of historic debt over a set period, often at a reduced amount.
  • The company remains under the control of existing management and continues in its current form.
  • Enables existing contracts to be retained.
  • Less public than liquidation or administration.
  • Can help retain jobs.

Cons:

  • Negatively affects your business’s credit rating.
  • Can be a lengthy process with a fixed term for monthly payments, usually lasting a few years.
  • Risk of rejection by creditors and/or shareholders.
  • No guarantee of viability post-CVA, with potential for future liquidation or administration.
  • Possible undesirable terms enforced by creditors or CVA advisor, such as dropping contracts or making redundancies.

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.

Does a CVA Affect all Creditors?

A CVA is legally binding for all unsecured creditors, including those who did not vote in favour of it. This means that all creditors must abide by the terms of the CVA, even if they do not receive full repayment of their debts.

However, a CVA cannot affect the right of a secured creditor to enforce its security except with its express consent.

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.

Proposing a CVA involves initial assessment fees, nominee fees for preparing and proposing the CVA to creditors, and supervisor fees for overseeing the arrangement once it is in place.

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. This underscores the critical importance of directors upholding their duties to creditors, focusing on recovery efforts, and executing the agreed-upon repayment strategy.

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

HMRC will typically approve a CVA if it meets the following criteria:

  • The company has a good track record of tax compliance.
  • The CVA proposal is fair and reasonable to all creditors, including HMRC.
  • The CVA proposal is realistic and achievable.
  • The company’s management team is competent and experienced.
  • The CVA proposal is in the best interests of the company and its creditors.

HMRC has stated that it approves around 70% of CVAs that it receives. This suggests that HMRC is generally willing to work with companies that are struggling financially and that it is open to considering innovative solutions.

How Does a CVA Affect Employees?

In the context of a Company Voluntary Arrangement (CVA), while the primary goal 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. This ensures that employees receive their due entitlements even as the company seeks to stabilise its financial situation through the CVA process.

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. Under the supervision of an insolvency practitioner, the company must make scheduled payments to creditors. Once the CVA terms are fully met, remaining debts are typically written off, freeing the company from those financial obligations. The business can then continue with a stronger financial footing, having addressed the issues that led to its initial distress. Successful completion signifies the end of the insolvency practitioner’s role and marks a fresh beginning for the company.

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 get in touch to talk with us about your situation and to decide whether we are the right people to help you.

Frequently Asked Questions about CVAs

Crafting a compelling CVA proposal is critical for gaining creditor approval. This involves presenting a clear, realistic plan for repayment and business restructuring that demonstrates your company’s potential for recovery. Engaging an experienced insolvency practitioner (IP) can significantly enhance your proposal’s credibility and your ability to negotiate terms that are acceptable to both your business and the creditors.

If your CVA proposal is rejected, it’s important to consult with your IP about alternative options. These might include renegotiating terms with creditors, exploring other forms of insolvency arrangements, or considering business restructuring outside of formal insolvency procedures. Each situation is unique, so tailored advice from your IP is essential.

While a CVA is primarily concerned with unsecured debts, the impact on secured creditors depends on the specific terms of the arrangement and any negotiations that take place. Generally, secured creditors retain their rights unless they agree to specific modifications as part of the CVA.

Yes, you can enter into new business contracts while under a CVA, provided these activities align with the overall goal of returning the company to profitability and do not contravene any terms of the CVA. It’s crucial to maintain transparent communication with your IP and, if necessary, seek approval for significant decisions that could affect the CVA’s success.

Selecting the right IP is crucial for the success of your CVA. Look for professionals with experience in your industry and a track record of successful CVA negotiations. It’s also beneficial to choose an IP who communicates clearly and is proactive in their approach to managing the CVA process.

Failing to meet the terms of your CVA can lead to its termination, which may result in creditors taking legal action to recover outstanding debts, potentially leading to liquidation. If you anticipate difficulties meeting CVA terms, it’s important to communicate early with your IP to explore possible adjustments to the arrangement or alternative solutions.