A Company Voluntary Arrangement is a statutory agreement between an insolvent limited company and its creditors.
If you think a CVA could be right for your company, read on to find out how this can help your company survive.
What is a CVA?
A CVA is a process which could allow your company to:
- come to a formal arrangement with company creditors over debt repayment terms
- allow you to pay a proportion of the debts, rather than the full amount
The CVA is legally binding and allows the insolvent company to repay a proportion of 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.
Company Voluntary Arrangement procedures have been a part of UK law since 1986 and is one of the Governments’ preferred rescue options for companies.
Who is Eligible for a CVA?
The CVA procedure is similar to an Individual Voluntary Arrangement, however, it is specifically designed for limited companies.
The CVA 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 has engaged an insolvency practitioner and can prove that the business 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.
How Does a CVA Work?
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;
(3) Creditors Meeting
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;
(4) Insolvency Practitioner’s Report
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
(5) CVA Commences
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.
Does a CVA Affect all Creditors?
Yes, a CVA is legally binding for all creditors. Once approval has been reported to the court, there is a 28 day period during which creditors can offer a challenge.
The Insolvency Act offers to grounds for challenge:
- material irregularity – that correct procedure was not followed
- unfair prejudice – i.e. that the CVA is not equally fair to all creditors
How Long does a CVA take?
Average CVA’s last between 2 and 5 years.
The exact terms will differ in every case, depending on the company’s ability to repay creditors.
In rare cases, CVA’s can even extend beyond the 5 year mark.
As to how long CVA’s take to arrange: they take around 8 weeks from the moment of appointing the insolvency practitioner to a successful creditor vote, on average.
Advantages of a Company Voluntary Arrangement (CVA)
- 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, similar to what is used in company administration called a moratorium helps to alleviate any creditor pressure, or legal action 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.
- At the end of the CVA period, if there are debts remaining, they may be written-off. Sometimes, it is also possible to extend the CVA to address any remaining debts, depending on the circumstances.
- 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.
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.
Is a CVA the Same as Administration?
While the process has similarities, it is a different thing to administration. A company would go into administration if it was officially insolvent but remained viable. CVA’s are usually done before the point of insolvency, as a means of avoiding that state of affairs being reached.
Companies in administration are under the control of insolvency practitioners whereas those under a CVA continue to be managed by directors.
Role of Directors
In most cases, directors continue to run the company as normal during a company voluntary arrangement.
In rare situations, company creditors may press for a change of management as part of the CVA process, in order to protect their own interests.
Unlike other insolvency procedures such as liquidation, CVA’s do not bring with them investigations into director’s conduct.
Directors Personal Guarantees
Any personal guarantees given by directors remain in place during a CVA.
In most cases, those creditors who hold the guarantee will abide by the terms of the CVA as it proceeds since this is the best chance of them recouping their money. It is not impossible, however, for a creditor to grow impatient, even as the CVA unfolds, and call in the guarantee.
This is a situation you would be wise to discuss with an insolvency practitioner such as ourselves, as the consequences can be serious.
As of 2019, the CVA process has been much in the news since it’s been used by major high street brands such as House of Fraser, Homebase, Debenhams, Monsoon and Paperchase, to name a handful.
Landlords have felt particularly unhappy about their widespread use because they can impose rent reductions upon the landlords. Some have even suggested that savvy retailers can use the CVA as a clever tactic to close under performing stores and break leases.
These days, all insolvency practitioners will be well aware of the potential for creditors to challenge a CVA under the grounds of ‘unfair prejudice’.
In SIP 3.2 (Statement if Insolvency Practice), it clearly states that insolvency practitioners should be mindful that a fair balance is struck between the interests of the company requesting the CVA and its creditors.
This is likely to remain a contested issue for some time as landlords continue to exert pressure on IP’s over the assertion that their interests are unfairly prejudiced.
Will HMRC Accept a CVA?
If HMRC are the main creditor, many directors wrongfully assume CVA’s are no longer an option. But HMRC do consider CVA’s if they can see they’ve been well thought through and make sense.
Their conditions for accepting a proposal are here, with figures suggesting they approve about 70%.
How Does a CVA Affect Employees?
Since the purpose of the CVA is to allow the company to survive and continue trading, it ideally won’t affect employees at all.
However, in some cases company voluntary arrangement’s mean there is restructuring, in which case redundancies may follow as the company seeks a more profitable situation.
In these situations, employees would be eligible for government redundancy payments, for which you can read more details here.