What is a Company Voluntary Arrangement (CVA)?
A Company Voluntary Arrangement (CVA) provides a way for financially distressed companies to pay off their debts over a fixed period while continuing to operate. This legal framework enables a company to reach an agreement with its creditors to pay all or part of its debts over an agreed timeframe, typically up to five years.
In a CVA, the company’s directors retain control of the business, unlike in administration or liquidation scenarios. The arrangement is supervised by a licensed insolvency practitioner, who ensures that the company adheres to the terms of the agreement and disburses payments to creditors as outlined.
CVAs are often seen as a flexible tool for business recovery, allowing companies to restructure their debts, improve cash flow, and potentially avoid more severe insolvency proceedings. It’s important for companies considering a CVA to seek professional advice to understand its implications and viability for their specific circumstances.
- What are the Advantages of a CVA?
- What are the Disadvantages of a CVA?
- Eligibility for a CVA
- How to Apply for a Company Voluntary Arrangement?
- Outline of the CVA process
- Does a CVA Affect all Creditors?
- How Long does a CVA take?
- Role of Directors in a CVA
- Will HMRC Accept a CVA?
- How Does a CVA Affect Employees?
- CVA Advice
What are the Advantages of a CVA?
Directors Retain Control of the Company, and It Can Continue Trading
A Company Voluntary Arrangement (CVA) allows directors to retain control of their company while it continues to trade. This aspect is crucial as it enables the management to maintain operational continuity and make strategic decisions without the interference that might come with other insolvency processes. The directors’ ability to steer the company during this challenging period can be vital for its recovery and long-term sustainability.
One of the significant advantages of a CVA is its cost-effectiveness compared to other insolvency rescue procedures, such as administration. The costs associated with a CVA are generally lower, making it a financially viable option for companies facing financial difficulties. This lower cost burden can be a critical factor for businesses seeking to resolve their financial issues without incurring excessive additional expenses.
Less Public than Other Insolvency Processes
A CVA offers a degree of privacy not typically available in other insolvency processes. There’s no obligatory requirement to inform clients or the general public about the CVA, allowing the company to manage its public image and business relationships more effectively during a financially sensitive period. This discretion can help maintain client confidence and business stability.
Creates a Legal Ring Fence Called a Moratorium
A pivotal benefit of a CVA is the creation of a legal moratorium, effectively a ring fence, that prevents creditors from taking legal action against the company during the CVA period. This protection gives the company breathing space to restructure its finances without the immediate threat of legal repercussions, enabling a more strategic approach to managing and resolving its financial issues.
Company Voluntary Arrangements can Freeze Interest and Charges
A CVA can provide the significant advantage of freezing interest and charges on the company’s debts. This freezing of additional financial charges helps stabilise the company’s financial situation, preventing the debt from escalating further and allowing the company to focus on meeting its agreed repayment commitments under the CVA.
It May Be Possible to Terminate Onerous Contracts as Part of the CVA Proposal
Within the framework of a CVA, there is an opportunity to terminate burdensome contracts, including supply contracts, leases, and employment contracts. This flexibility can be instrumental in reducing the company’s operational costs and liabilities, aiding in its financial recovery and long-term sustainability.
The Insolvency Practitioners’ Fees Are Included
Another practical aspect of a CVA is that the fees for the Insolvency Practitioners are included within the fixed monthly repayment amount agreed upon in the arrangement. This inclusion provides clarity and predictability in financial planning, as there are no separate or additional charges for the Insolvency Practitioners’ services.
No Requirement for Directors Conduct to Be Investigated
Avoiding liquidation through a CVA means that there is no compulsory investigation into the directors’ conduct. This absence of investigation can be beneficial for the directors, as it reduces the scrutiny and potential personal repercussions they might face in a liquidation scenario.
Better Alternative to Liquidation
A CVA is often seen as a preferable alternative to liquidation because it is only proposed if the return to creditors is expected to be better than in a liquidation scenario. This requirement ensures that a CVA is a viable and beneficial option for both the company and its creditors, focusing on maximising the return and preserving the company’s value.
At the End of the CVA Period, Debts Remaining May Be Written-Off
A significant benefit at the conclusion of the CVA period is the potential for remaining debts to be written off. This provision can significantly aid in the financial rehabilitation of the company, allowing it to emerge from the CVA process with a cleaner slate and a stronger foundation for future operations.
What are the Disadvantages of a CVA?
Impact on Company’s Credit Rating for 6 Years
A considerable disadvantage of a Company Voluntary Arrangement (CVA) is its impact on the company’s credit rating. Although a CVA does not affect the personal credit rating of the directors, it adversely affects the company’s credit rating for a period of six years. This lowered credit rating can hinder the company’s ability to secure future credit, impacting its financial flexibility and growth opportunities.
Difficulty in Gaining Bank Agreement
Securing agreement from the bank for a CVA can be challenging. Banks may be hesitant to support a CVA due to the inherent risks and uncertainties involved. This reluctance can pose a significant obstacle for companies seeking to implement a CVA, as bank support is often crucial for the arrangement’s success and the company’s ongoing financial operations.
Dislike from Some Creditors Due to Length of CVA Process
The duration of a CVA can be a point of contention for some creditors. Creditors may be dissatisfied with the extended period over which repayments are made, preferring a quicker resolution to the company’s financial obligations. This dissatisfaction can lead to difficulties in gaining creditor support for the CVA, which is essential for its approval and implementation.
Secured Creditors Not Bound by CVA Terms
A notable limitation of a CVA is that secured creditors are not bound by its terms. This means entities such as HMRC or banks, holding secured debts, can still pursue actions like withdrawing funding or pushing for liquidation, regardless of the CVA. This potential action from secured creditors can pose a significant risk to the company’s financial stability and the successful execution of the CVA.
Risk of Voluntary or Compulsory Liquidation if CVA Proposal Fails
If a CVA proposal is unsuccessful, the directors may face the stark choice of entering voluntary liquidation or confronting compulsory liquidation initiated by creditors. This situation presents a significant risk, as the failure of a CVA can escalate the company’s financial distress, potentially leading to its ultimate liquidation and the cessation of its operations. This risk underscores the critical nature of carefully considering and preparing a viable CVA proposal.
Eligibility for a CVA
To be eligible for a Company Voluntary Arrangement (CVA), a business must meet certain criteria:
- Insolvency or Contingent Insolvency: The company should be insolvent or contingently insolvent, meaning it cannot pay its debts as they fall due, or its liabilities exceed its assets.
- Creditor Approval: A CVA proposal must be presented to the company’s creditors and receive approval from at least 75% by value of the creditors who vote on the proposal. This percentage is based only on the votes of those who actually vote.
- Feasibility of the Proposal: The proposed CVA must be realistic and feasible. It should offer a better outcome for creditors than if the company were to go into liquidation. This typically involves a detailed business plan demonstrating how the company will generate the funds to meet the CVA terms.
- Supervisor Appointment: A licensed insolvency practitioner must be appointed to act as the supervisor of the CVA. This professional will oversee the arrangement, ensuring that the company adheres to the terms and disburses payments to creditors as agreed.
- Company Structure: CVAs are available to limited companies, limited liability partnerships (LLPs), and other corporate entities. Sole traders and partnerships can also propose a similar arrangement known as an Individual Voluntary Arrangement (IVA).
- Court Approval: In some cases, court approval may be required for a CVA, particularly if creditors or shareholders challenge the arrangement.
It’s important for companies to seek professional advice to assess their eligibility for a CVA and understand its potential implications. A tailored approach is necessary as each business’s situation is unique.
How to Apply for a Company Voluntary Arrangement?
To start a Company Voluntary Arrangement (CVA) for a limited company, you’ll need to work with an insolvency practitioner who will help you create a proposal. The proposal outlines how you plan to pay back your debts and over what time period.
Once the proposal is ready, it will be sent to your creditors for a vote.
Outline of the CVA process
The Company Voluntary Arrangement (CVA) process involves several key steps:
- Initial Consultation and Assessment: The company seeking a CVA must first consult with a licensed insolvency practitioner (IP). The IP assesses the company’s financial situation to determine if a CVA is a viable option.
- Proposal Development: If a CVA is deemed suitable, the IP assists in preparing a proposal. This document details the company’s financial position, reasons for its difficulties, and a plan for repaying creditors over a set period. The proposal often includes a restructuring plan for the business.
- Nominee’s Report: The IP, acting as a ‘nominee’, reviews the proposal and prepares a report for the court. This report assesses the viability of the CVA and recommends whether creditors should consider it.
- Creditors’ Meeting: The proposal is presented to the creditors at a meeting. Creditors are given advance notice and a copy of the proposal and the nominee’s report. They can vote on the proposal in person, by proxy, or by post.
- Approval of the CVA: For the CVA to be approved, at least 75% (by debt value) of the creditors who vote must agree to it. This does not include any associated creditors, such as employees or directors of the company.
- Implementation and Supervision: Once approved, the IP becomes the ‘supervisor’ of the CVA. The company starts making payments as agreed in the proposal. The supervisor is responsible for distributing these payments to creditors and monitoring the company’s compliance with the terms of the CVA.
- Completion: If the company successfully meets all the terms of the CVA, the arrangement is completed, and any remaining debt is typically written off. The company continues to operate free from those debts.
It’s important to note that during the CVA, the directors retain control of the business, but the company must adhere strictly to the agreed terms to avoid the risk of liquidation. The duration of a CVA is usually between 3 to 5 years, but this can vary depending on the specific circumstances of the company.
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?
CVAs typically take around 8 weeks from appointing the insolvency practitioner to a successful creditor vote, on average.
In some cases, a CVA may be completed more quickly than 8 weeks, while in other cases, it may take longer. It is important to note that the CVA process can only begin once the insolvency practitioner has been appointed.
Role of Directors in a CVA
In most cases, directors continue to run the company as normal during a CVA. However, they are subject to the supervision of an insolvency practitioner, who will monitor their performance and make sure that they are acting in the best interests of creditors.
In rare cases, creditors may press for a change of management as part of the CVA process. This may happen if creditors believe that the current directors are not capable of managing the company effectively or that they have acted irresponsibly in the past.
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?
The purpose of a CVA is to allow the company to survive and continue trading. Therefore, the ideal outcome is that it will have no impact on employees. However, in some cases, a CVA may involve restructuring, which could lead to redundancies.
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.