What is a Company Voluntary Arrangement (CVA)?
A Company Voluntary Arrangement is a statutory agreement between an insolvent limited company and its creditors. The arrangement is legally binding and allows the insolvent company to repay a percentage 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. Company Voluntary Arrangements have been a part of UK law since 1986 and is one of the Governments’ preferred rescue options for companies.
What is the Company Voluntary Arrangement Process?
- Once the licensed 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 IP will then write to creditors and invite them to vote at a creditors’ meeting;
- A Moratorium can be applied for ‘breathing space’ by preventing suppliers and other 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 and the Insolvency Practitioner has been appointed as the Supervisor, they 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 a CVA 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.
Advantages of a Company Voluntary Arrangement
- The directors retain control of the company and it can continue trading;
- 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 called a moratorium helps to alleviate any creditor pressure during the CVA period;
- Can freeze interest and charges;
- It may be possible to terminate onerous contracts as part of the CVA proposal, including supply contracts, lease and employment contracts;
- The Insolvency Practitioners’ fees are included within the agreed fixed repayment amount each month;
- 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.
Disadvantages of a Company Voluntary Arrangement
- 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.
Eligibility for a CVA
This procedure is similar to an Individual Voluntary Arrangement, however, it is specifically designed for limited companies. The procedure is primarily adopted by insolvent businesses 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 and continuing to pay ongoing taxes like VAT/PAYE, etc.
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.
What if the CVA 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.
Read our full article here on When a CVA Proposal is Rejected.
What happens to Employees in a Company Voluntary Arrangement?
Since a CVA is an insolvency event, employees will qualify for redundancy from the government if it’s necessary to reduce staffing levels in order to save the company. The Company Voluntary Arrangement does not absolve the company of its legal responsibilities towards employees, who are entitled to normal redundancy notice periods as per the details of their contracts.
Fortunately, in many cases the company is able to continue running as normal without any need to lay off employees.For more information, read our full article on Making Employees Redundant in a CVA.
What does the Insolvency Act 1986 Stipulate about a CVA?
You can read the full details of the legislation here.
Can we Help?
Call 08000 746 757 to find out how we can help advise you on Company Voluntary Arrangements. You call also call one of our top insolvency professionals Sue Collins directly on 07949 969 006 in the strictest confidence.