Company Voluntary Arrangements (CVA)
A Company Voluntary Arrangement is a statutory agreement between an insolvent limited company and its creditors. The arrangement allows the insolvent company to repay its debts over a period of 1 to 5 years. For the proposal to be approved, at least 75% of the creditors (by value of debt) need to agree to the proposal’s terms.
What is the process?
- Once the Insolvency Practitioner has been contacted they will begin to create the arrangement and draft a written proposal after gathering the necessary information about the company’s affairs;
- Once the proposal has been reviewed by the directors the Insolvency Practitioners will then write to creditors and invite them to vote at a creditors’ meeting;
- A Moratorium can be applied for ‘breathing space’ by preventing creditors from taking any further action against the company whilst the proposal is negotiated;
- The creditors’ meeting is an opportunity for creditors to voice any concerns about the proposal and its viability. The creditors can either be at the meeting in person, or they can vote by proxy (email or post). Directors are not obligated to attend the meeting of creditors;
- If at least 75% of the creditors agree (by value of debt) to the proposal then the CVA is approved;
- There will also be a separate meeting held for the connected creditors such as employees or directors. At least 50% of the connected creditors (by value of debt) need to agree to the proposal for it to be successful;
- Once the CVA has been approved, the Insolvency Practitioners will distribute a report to the court and the creditors, detailing the information of the meetings that were held and the votes that were cast;
- The CVA then begins once the successful voting has taken place from the meeting of creditors. Your company will then make scheduled payments to the creditors via the Insolvency Practitioner as part of the arrangement, to repay the debt. The company is protected by the arrangement providing all scheduled payments are made. If the company defaults on a payment it is likely that the it will be wound up via compulsory liquidation.
What is included within the proposal?
Some of the key elements that are included within a Company Voluntary Arrangement proposal are listed below:
- How the company has got to this stage;
- The value of assets, third party properties, liabilities and the companies financial position;
- A cash-flow forecast and the likely amounts that the company is going to be able to pay each month;
- The reasons why the creditors should agree to the CVA;
- Duration of the CVA, the Nominee’s expenses/remuneration and the Supervisor’s duties;
- Any guarantees that the directors (or anyone else) will offer;
- How funds are to be banked/invested/dealt with;
- Proof that the return will be better for the creditors than liquidation.
- The directors retain control of the company and it can continue to trade;
- CVA’s have lower costs than alternative insolvency rescue procedures like administration;
- Less public than other insolvency processes (i.e. there’s no need to tell clients);
- A legal ring-fence can stay any creditor action via a moratorium;
- Since the company has avoided liquidation, there’s no requirement for directors conduct to be investigated;
- Seen as a better alternative to liquidation as the return must be better in order for a CVA to be proposed;
- It can be a viable option to help stop a winding up petition.
- Whilst the CVA will not affect your personal credit rating, it will affect the company’s credit rating for 6 years;
- Obtaining agreement from the bank may be challenging;
- Some creditors may dislike the length of time that a CVA takes;
- Secured creditors are not bound by the terms, which means either HMRC or the bank, for example, could still withdraw their funding or push for liquidation;
- If the proposal is unsuccessful the directors may have to consider voluntary liquidation, or the creditors may select to wind the company up via compulsory liquidation.
This procedure can be adopted by insolvent companies that want to ring-fence any historic debts, allowing the limited company to trade on, as normal. A company may be eligible for a Company Voluntary Arrangement when:
- The company is insolvent;
- The company can prove to the Insolvency Practitioner that it is still viable as a going concern. This means that the company must be able to show that it will have enough capital in the future to repay the debts, whilst remaining profitable.
The directors’ role
As always, the directors are obliged to act in the best interests of the creditors for this procedure. If any personal guarantee has been signed, the director would only be made personally liable for that amount if the CVA fails. For this reason, a successful Company Voluntary Arrangement is in both the creditors’ and the directors’ best interests. During a CVA the directors remain in control and there is no investigation into their conduct, as part of the process. If HMRC is involved, it will mean that all accounts and tax submissions will need to be up to date to ensure they have a clear picture of any taxes that are owed.
Alternative options if the proposal is rejected
If the proposal is rejected the shareholders may want to consider some of the alternative options listed below:
- Depending on how viable your business is and its financial position you may want to consider some finance options, such as Invoice Finance or a business loan;
- Company Administration is another option for some limited companies;
- As a last resort, you may consider closing your company via the most appropriate option for an insolvent company and this is called a Creditors’ Voluntary Liquidation.
If the proposal is rejected any creditor can also apply for compulsory liquidation against your company via a winding up petition for any debt greater than £750. If your company is forcefully wound up by a creditor the Official Receiver usually takes the control of the company’s affairs away from the directors.
Call 08000 746 757 to find out how we can help advise and guide you on a Company Voluntary Arrangement. You call also call one of our top consultants Sue Collins directly on 07949 969 006 in the strictest confidence.