Understanding Company Voluntary Arrangements (CVAs)

What is the process for a Company Voluntary Arrangement (CVA)?

A Company Voluntary Arrangement, known as a CVA, is a proper way for a financially troubled company to sort out its debts. It’s like a payment plan that the company and its creditors agree on, and it’s legally binding. CVAs usually go on for 3-5 years. In that time, the company pays a set amount each month, and that money is then shared among the creditors fairly.

 

What is a Company Voluntary Arrangement (CVA)? Advantages and Disadvantages Explained

A Company Voluntary Arrangement, often called a CVA, is a proper way for a company struggling with debts to sort things out. It’s a legal plan where the company and its creditors agree on how to pay back what’s owed. The idea is to manage the company’s debts over a set period, usually 3-5 years, with payments that the company can afford and the creditors are happy with. Depending on what the company can afford, some of the debt might even be cleared.

But not all companies can get a CVA. For it to happen, at least 75% (by value) of the creditors need to agree to the plan. They’ll only say yes if they trust the company can stick to the payments throughout the CVA period.

A CVA can only happen with the help of a licensed insolvency practitioner. They take charge as the nominee and supervisor for the whole process. They start by coming up with a payment plan based on what the company can afford to pay. Then, they present this plan to the creditors who get to vote on whether they agree with the terms or not.

When a struggling business looks like it can get back on its feet and become profitable again, and the directors want to keep going, a CVA might be a good way to avoid legal troubles with creditors. The terms of a CVA usually mean the company has to pay less money each month, making things easier for the business. Plus, it creates a solid agreement that all creditors have to stick to, making it more likely they’ll get some of their money back.

In a CVA proposal, the terms will say how much of the debt the creditors will get back over the time of the company voluntary arrangement. This mostly depends on how much the company owes compared to what it can realistically pay, considering its current and/or expected cash flow.

 

Is Your Company Eligible or Suitable for a CVA?

Before getting too hopeful about the advantages of using a CVA to turn things around, it’s crucial to check if your company is actually qualified and suitable for the process. Here are some important points to think about:

• The company needs to be insolvent or possibly insolvent (considered insolvent after taking possible future liabilities into account).

• Both the directors and the appointed insolvency practitioner must believe that the business can bounce back and have a realistic chance of recovery.

• The business should have expected cash flow forecasts that show there will be enough money to cover the agreed repayment amounts.

It’s useful if the company already has good financial accounting and reporting systems in place, as this paperwork will make the process smoother.

 

The Main Benefits of a Company Voluntary Arrangement (CVA)

Apart from the clear benefits of a CVA, consider these main advantages:

• Stops pressure from creditors and HMRC while the arrangement is being prepared.
• Shields your company from any legal actions by creditors as long as you stick to the terms of the arrangement.
• Combines all your creditors into a single monthly payment.
• Company directors and shareholders stay in charge of the business throughout the process. There’s no need to publicly announce in the London Gazette that you’re in a Company Voluntary Arrangement, as you would have to in company administration.
• Can prevent a winding-up petition from shutting down your company. Remember, the CVA usually needs to be suggested within 7 days of receiving a winding-up petition for it to work.
• Increases cash flow.
• Sets up a deal that benefits both sides, ensuring your creditors get at least some (between 20%–100%) of the money owed to them in a reliable way.

 

The Steps Involved in the CVA Process

Here’s a basic overview of the events that paved the way for a successful CVA:

1. The Initial Assessment  – To initiate the CVA process, start by getting in touch with an insolvency practitioner. The IP will assess whether a CVA is the most suitable step for your company and its creditors.
2. Appointing an IP to Draft the CVA – If a company voluntary arrangement is advised and you wish to move forward, appoint the IP to prepare a CVA proposal for your creditors.
3. Directors consider the CVA draft proposal – Once the IP has crafted a CVA proposal, your company’s directors will review it, making revisions if necessary. If directors doubt the company’s ability to comply with the CVA terms and a practical draft can’t be formulated, the IP might suggest opting for a creditors’ voluntary liquidation instead. The insolvency practitioner needs to be sure that the CVA has a genuine chance of success before serving as the nominee.
4. The CVA is Filed with the Court – The ultimate version of the CVA is submitted to the Court, assigned a legal originating number, and signed copies of the proposal are dispatched to all creditors. The CVA should reach creditors at least three weeks before the scheduled creditors’ meeting.
5. Creditors’ and Shareholders’ Meetings are Held – The designated IP organises a gathering of the company’s unsecured creditors. It’s typical for creditors to be absent, with many sending representatives or submitting proxy forms via post or fax to express their acceptance or rejection of the CVA proposal. In the meeting, the IP presents the CVA to creditors, allowing them (or their representatives) to inquire, suggest revisions, or request amendments to the proposal. Simultaneously, a meeting of the company’s shareholders occurs.
6. Creditors and Shareholders Vote On Whether to Approve the Proposal – During the creditors’ meeting, a vote will be conducted, and if creditors responsible for 75% or more of the company’s unsecured debt support the CVA, it gets approved. The same 75% majority approval rule applies if modifications to the proposal are requested. This phase of the process often concerns directors, but with careful drafting of a comprehensive CVA and proactive communication with creditors before the meeting, obtaining approval should generally pose no issue. Concerning the shareholders’ meeting, a minimum of 50% of shareholders must vote in favour of the proposal for it to be approved.
7. Meeting Chairman Issues Report – If both meetings yield approval for the proposal, the chairman (the appointed IP) is required to issue a report to all of the company’s creditors and the Court within four days of the meeting. This report will offer a summary of the meeting proceedings, detailing attendees and how each party cast their votes.
8. Any Legal Actions Against Your Company stay – Once the CVA gains approval, any ongoing legal actions against your company are temporarily halted, and no additional actions can be pursued unless there is a default on the CVA.
9. Regular Contributions are Made to a Trust Account – Ultimately, once the CVA is active, your company is obligated to fulfil the anticipated contributions to a trust account. Meeting these contributions ensures the business can operate without the risk of closure. However, failure to meet these commitments may lead to compulsory liquidation. It’s crucial to note that a breach of the Company Voluntary Arrangement terms will likely prompt the supervisor of the arrangement to petition for the company’s winding up through compulsory liquidation.

 

What is the role of HMRC in a CVA?

For the majority of companies grappling with escalating financial pressures, outstanding tax arrears owed to HMRC often contribute to the challenge. In the CVA process, HMRC holds the status of a preferential creditor, granting them the right to vote at the creditors’ meeting to determine CVA approval. It’s crucial to bear in mind that a CVA necessitates agreement from at least 75% (by value) of all creditors, including HMRC.

While HMRC might be just one among several creditors, the owed amount could be disproportionately substantial, granting them a potentially decisive vote in CVA approval.

Despite the initial daunting aspect, HMRC tends to be more accommodating than anticipated. Their interest lies not only in recovering owed taxes but also in supporting the continuity of UK businesses for the overall benefit of the broader economy.

Considering that an alternative to CVA is the company heading towards liquidation, as long as you can present a compelling case for the CVA, demonstrating your company’s ongoing viability, HMRC is likely to be receptive to accepting the proposal.

 

What is the role of shareholders in a CVA?

If creditor approval is secured for the CVA, the proposal moves to the shareholders’ stage where they cast their votes. A CVA necessitates the approval of over 50% of shareholders to be ratified.

In a company with two shareholders, both must agree for the CVA to proceed. For companies with a larger shareholder base, the rule implies that a CVA can pass without unanimous support, as long as the majority deems it in the best interests of the company and its creditors.

If less than 50% of shareholders support the proposed CVA, it gets rejected, and neither party is bound by its terms. Subsequently, shareholders need to explore alternative ways to address the company’s outstanding debts, which could involve alternative insolvency procedures like placing the company into administration or reaching a more informal agreement with creditors.

Conversely, shareholders might reject the CVA if they doubt the company’s viable future or have no interest in saving the business. In such a scenario, the company may opt for a formal liquidation procedure such as a Creditors’ Voluntary Liquidation (CVL), resulting in the company’s closure.

 

What Does a CVA Proposal Contain?

The contents of the CVA proposal must adhere to the guidelines set by The Insolvency Rules 1986 – Rule 1.3, as mandated by law. A standard CVA will encompass essential details about the insolvent business and the nominated individual, who must be a licensed insolvency practitioner (i.e., names, addresses, and contact information). It will offer a comprehensive overview of the company’s situation, including details about employees, profits, and noteworthy transactions or events.

The insolvency practitioner, appointed as the nominee, collaborates with your company’s directors to ensure this section is accurate and detailed. Following the introduction, the main proposals are presented, along with information about the company’s creditors and debts. It’s important to be prepared to furnish documentation and factual information about your company during the CVA drafting process.

 

How Long Does a CVA Proposal Take to Complete?

Typically, there’s an interval of about one month from appointing the insolvency practitioner to the production of the CVA and its dispatch to creditors. Subsequently, the creditors’ meeting is usually scheduled around 3 weeks later. In total, the entire process typically takes about 6-8 weeks on average. However, it’s important to note that following this period, you’ll be obligated to make regular contributions to the specified trust account for up to 5 years, depending on the CVA’s duration.

 

When Can a CVA Be Proposed?

A Company Voluntary Arrangement (CVA) remains a viable option up until the point when a winding-up order is officially granted against your company. Even if you’ve received a winding-up petition or are facing the threat of one from creditors, acting promptly allows you the opportunity to establish a CVA and potentially salvage your business. Once the winding-up order is granted, compulsory liquidation initiates, making the prospect of recovery through any means highly improbable.

In the event your company enters administration, the administrator might propose a CVA as part of the procedure to facilitate a turnaround. Similarly, a liquidator may suggest a CVA if it is deemed more beneficial to creditors than liquidating the company’s assets. Additionally, a company already in a CVA can also transition into liquidation if necessary.

 

How Much Does a CVA Cost to Propose?

The primary expense incurred when establishing the arrangement is the fee for engaging an insolvency practitioner to develop and present the CVA proposal on your behalf, commonly referred to as the nominee’s fee. The exact cost varies based on the complexity of the case, the extent of work required, and the insolvency firm chosen. On average, nominee fees typically range between £5000 and £10000. The supervision costs of the arrangement, however, are determined by the creditors. It’s important to note that these fees are deducted from the funds allocated to creditors, and it is the creditors who collectively agree on the fees for the insolvency practitioners.

 

What happens after a CVA? Can companies survive?

The primary objective behind initiating a company into a Company Voluntary Arrangement (CVA) is to rescue the business, enabling it to continue trading well into the future. Notably, a CVA won’t be sanctioned if the business is deemed unviable moving forward. With this in mind, the fundamental purpose of a CVA is precisely to afford the company the chance to survive.

Upon the conclusion of the CVA, any outstanding debts included in the proposal are typically written off. This places the company in a favourable position for the future, and those companies successfully completing a CVA have a good chance of long-term survival.

Regrettably, not all CVAs are successful. For companies unable to fulfil a CVA—perhaps due to missed payments—the future may not be as promising. While the CVA can potentially be modified to help the company recover, in many instances, this isn’t feasible.

It’s essential to acknowledge that a CVA is a legal agreement. If one party breaches it, for instance, by failing to make required payments promptly, the creditor can pursue the debt and take legal action if necessary. This could manifest as a Winding Up Petition, potentially forcing the company into compulsory liquidation.

CVAs can prove particularly effective for companies needing to retain specific certifications or contracts that can’t be transferred. Nevertheless, it’s important to note some downsides to CVAs; they can impact a company’s credit score, and at times, companies may encounter difficulties in receiving their regular supplies.

At Vanguard Insolvency, our insolvency practitioners possess extensive experience in constructing CVAs with a high approval rate and long-term success. For a free consultation, reach out to us via email or call us at 0121 769 1915.

If you still have questions about Company Voluntary Arrangements, you can find more answers in our CVA FAQs. Vanguard Insolvency provides director advice online, over the phone, or in person at one of our 100+ UK offices or a location convenient for you.

 Read More:

• How are employees affected in a CVA
• CVA vs liquidation
• CVA debt write off
• CVA rejected
• Hiving as part of Company Voluntary Arrangement

 

Frequently Asked Questions about CVAs

What is the purpose of a company voluntary arrangement?

A Company Voluntary Arrangement (CVA) serves as a mechanism allowing a debtor company to renegotiate its unsecured debt, which may encompass suppliers, landlords, employees, and HMRC.

The fundamental purpose of a CVA is to enhance the liquidity of a viable company, enabling it to sustain operations and overcome financial challenges over time. With a CVA in effect, costs are reduced, and working capital availability is increased.

For a CVA to be implemented, it requires the approval of 75% or more of creditors, with the condition that the number of unconnected creditors voting against it does not exceed 50%. This arrangement empowers businesses to manage their budgets more effectively and sidestep the necessity for more drastic insolvency measures.

 

How does a CVA affect employees?

Employees can face challenges due to a Company Voluntary Arrangement (CVA) as its primary objective is to reduce costs, and payroll liabilities are often significant for a struggling business. This increases the risk of staff redundancies.

In cases where staff redundancies are inevitable, eligible employees can claim redundancy pay and other statutory entitlements through the Redundancy Payments Service (RPS). The advantage is that they receive their payments promptly, and in turn, the government becomes a creditor within the CVA.

On a positive note, a company continues to operate during a CVA, creating a continued need for staff familiar with the business. The restructuring inherent in a CVA provides an opportunity for the company to streamline operations and potentially save jobs that might otherwise have been lost through liquidation.

 

Will creditors accept a CVA?

In most cases, creditors are inclined to accept a Company Voluntary Arrangement (CVA) since the repayments generally offer a more favourable return compared to the outcome if they were to forcibly wind up a company. However, a shift in HMRC’s priority for repayment in insolvency cases may impact this dynamic.

If a company owes substantial tax arrears, particularly taxes collected on behalf of the tax body, HMRC’s upgraded status to a secondary preferential creditor for certain taxes in arrears can have adverse effects on unsecured creditors. As a significant creditor in insolvency cases, HMRC’s position can influence whether other creditors are willing to accept a CVA proposal.

 

Do CVAs often lead to administration?

When a Company Voluntary Arrangement (CVA) is implemented, the underlying assumption is that the company will trade its way out of financial distress. However, circumstances can change, and a failed CVA may result in the company entering administration.

Choosing administration initially helps avoid immediate liquidation and offers an eight-week ‘breathing space’ for the administrator to assess the optimal course of action. This may involve a pre-pack administration sale of the business assets, potentially to the existing directors.

In cases where a CVA leads to administration, be it ‘standard’ company administration or pre-pack, it can present directors with an alternative route that steers clear of immediate liquidation.

 

What happens if CVA proposals are rejected?

Company Voluntary Arrangements (CVAs) typically present a more favourable return to unsecured creditors compared to compulsory liquidation, as unsecured creditors are generally positioned at the bottom of the hierarchy for repayment.

In the event that a CVA proposal is rejected by creditors, the company may explore other options based on its unique situation. Administration and pre-pack administration could be viable alternatives depending on the circumstances.

While there are instances where liquidation becomes unavoidable, a Creditors’ Voluntary Liquidation (CVL) may be initiated. This process safeguards creditor interests and enables directors to fulfil their legal obligations. The licensed insolvency practitioner advising the company will assess the best course of action if a CVA proposal is rejected.