What is a Company Voluntary Arrangement? What is the ‘CVA’ Process and why is it used?
A CVA is a statutory agreement between a company and its creditors. It is a rescue tool that allows an 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 need to agree to the terms.
The most important things to be written within the proposal are:
- The reason creditors should agree with a CVA;
- Assets’ values, third party properties, liabilities;
- 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 will funds be banked/invested/dealt with.
- Proof that the return will be better for the creditors than liquidation.
A CVA takes approximately 1-3 months to be implemented by an Insolvency Practitioner dependent on the negotiations with creditors:
- The Insolvency Practitioner will work out the arrangement and prepare a written proposal pinpointing all the details of what the agreement will involve, and what the company’s obligations will be;
- The Insolvency Practitioners will then write to creditors and invite them to vote;
- If all creditors who are owed at least 75% of the debt vote in favour of the proposal, the CVA is approved.
- HMRC’s involvement will mean that all accounts and tax submissions are up to date to ensure a clear picture of any taxes owed.
- Your company will then make scheduled payments to the creditors via the Insolvency Practitioner as part of the arrangement, to repay the debt.
Advantages and Benefits
- 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
- 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 will affect the company’s credit rating for 6 years
- Obtaining agreement from the bank may be challenging
- Some creditors may dislike the 3-5 year period of which a CVA generally runs
- 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 up your business via compulsory liquidation.
When is this Procedure Useful?
This procedure can be adopted by directors who want to ring-fence any historic debts, allowing the limited company to trade on, as normal. A CVA is used when:
- A company is insolvent;
- A company, which has a great deal of debt, proves that it is still viable for trading (the company must show that it will have enough capital in the future to cover the debts).
The Insolvency Act 2000 makes a provision for companies with a smaller turnover (less than 5.7 million) to obtain a moratorium during the period running up to a CVA, so they can get the company affairs in order while keeping creditors at bay. Before this was introduced by the Insolvency Act 2000, the only way of achieving this was to put the company into administration. A key stipulation for this to be approved is that the company must have enough money left in the coffers to continue running the business for the duration of the moratorium.
Fees and Costs
Given the wide parameters of a CVA, the costs can vary hugely, however, the basic costs are those of the ‘nominee’ – the person stipulated to supervise the implementation of the proposal. Usually, this is an Insolvency Practitioner.
Are CVA Debts liable for Corporation Tax?
The simple answer is no. Under Section 144 Finance Act 1994, any debts that are written off as a result of CVA are not subject to taxation.
Will it affect My Personal Credit Rating?
No. A Company Voluntary Arrangement will not affect your personal credit rating.
Making Employees Redundant
This may involve some tough decisions. If one of these involves laying off employees, it’s worth realising that if redundancies will save the entire company from liquidation they’re a necessary step. More positively, it’s worth remembering that a CVA is an insolvency process which may entitle employees to redundancy pay from the government.
What if the CVA is Rejected by Creditors?
If the creditors reject the proposal the shareholders may have to consider insolvent voluntary liquidation (Creditors’ Voluntary Liquidation).
Any creditor can also apply for compulsory liquidation against your company via a winding up petition for any debt that is greater than £750. If your company is forcefully wound up by a creditor the Official Receiver usually takes control of the company’s affairs. The Official Receiver’s role is to get the best return for the creditors and also to investigate the conduct of the directors.
Although secured creditors don’t vote in a Company Voluntary Arrangement, it cannot legally protect them from calling in their loan or enforcing their security. It’s worth bearing in mind, therefore, that this does give them a veto of sorts, since they can recall their loan if they feel the CVA arrangement impinges on their rights in any way.
- Depending on how viable your business is you may want to consider finance options for your company such as Invoice Finance.
- Company Administration is another option for some companies.
- As a last resort you may be considering closing your company and the most appropriate option for an insolvent company in this situation may be a Creditors’ Voluntary Liquidation.
Call 08000 746757 to find out how we can help advise you on a Company Voluntary Arrangement.
Live Chat with our support team or call direct on 07949 969 006 to speak with our Senior Consultant Sue Collins in the strictest confidence.