What is a Company Voluntary Arrangement (CVA)?
If your limited company is struggling financially and unable to meet its debt obligations, you can consider establishing a Company Voluntary Arrangement (CVA). This arrangement allows you to restructure your company’s debts and repay them over a predetermined period.
What is a CVA?
A Company Voluntary Arrangement (CVA) is a formal insolvency procedure that allows a financially struggling company to reach a legally binding agreement with its creditors. This agreement involves the company proposing a plan to pay off its existing debts over an extended period, typically up to five years.
The CVA process is initiated by the company’s directors and is overseen by an insolvency practitioner. To be approved, the CVA proposal must receive a majority vote of 75% or more in value from the company’s creditors. Once approved, the CVA becomes legally binding for all creditors, even those who voted against the proposal.
Who is Eligible for a CVA?
A company can apply for a Company Voluntary Arrangement (CVA) if it meets the following criteria:
- The company is unable to pay its debts as they fall due
- The company is likely to become unable to pay its debts in the future
- The company has a reasonable prospect of surviving as a going concern if a CVA is approved
How to Apply
To apply for a CVA, the company must appoint an insolvency practitioner to help them prepare a proposal. The proposal will outline how the company plans to repay its debts over a period of time. The proposal will then be sent to the company’s creditors for a vote. If the proposal is approved by more than 75% of the creditors in terms of value, the CVA will be binding on all of the company’s creditors.
Advantages of a Company Voluntary Arrangement (CVA)
Preserves company control and operations: Directors retain control of the company, allowing them to implement restructuring plans without external interference.
Cost-effective solution: CVAs are less expensive than other insolvency procedures, reducing the financial burden on the company.
Discreet process: CVAs are generally less public than other insolvency proceedings, minimizing reputational damage to the company.
Legal protection: A CVA imposes a moratorium, shielding the company from legal action during the restructuring period.
Control over interest and charges: The company can freeze interest and charges on existing debts, improving cash flow.
Contract termination: Onerous contracts, such as supply, lease, or employment contracts, can be terminated under the CVA proposal.
Predictable fees: Insolvency practitioners’ fees are included in the fixed repayment amount, ensuring budgeting certainty.
Director conduct not investigated: Since liquidation is avoided, there is no need for an investigation into directors’ conduct.
Superior alternative to liquidation: A CVA offers a better return to creditors compared to liquidation, making it a more attractive option.
Winding-up petition defense: A CVA can effectively halt a winding-up petition, preventing the company’s dissolution.
Potential debt write-off: Remaining debts at the end of the CVA period may be written off, providing financial relief.
Disadvantages of a Company Voluntary Arrangement (CVA)
Credit rating impact: While personal credit remains unaffected, the company’s credit rating will be negatively impacted for six years.
Negotiation challenges with banks: Obtaining bank approval for a CVA can be difficult due to their secured creditor status.
Creditor dissatisfaction: Some creditors may object to the extended timeframe of a CVA.
Unbound secured creditors: Secured creditors, such as HMRC or the bank, are not bound by the CVA terms and can still withdraw funding or pursue liquidation.
Liquidation fallback: If the CVA proposal fails, directors may be forced into voluntary liquidation, or creditors may initiate compulsory liquidation.
Does a CVA Affect All Creditors?
A CVA is legally binding on all unsecured creditors, regardless of whether they voted in favor of it. This means all creditors must adhere to the CVA’s terms, even if they don’t receive full repayment.
However, a CVA cannot affect a secured creditor’s right to enforce their security, unless they explicitly agree to it.
How Long Does a CVA Take?
CVAs typically take about eight weeks from appointing an insolvency practitioner to a successful creditor vote.
In some cases, a CVA may be completed more quickly, while in others, it may take longer. It’s 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 usual during a CVA. However, they are subject to the supervision of an insolvency practitioner, who will monitor their performance and ensure they act in creditors’ best interests.
In rare cases, creditors may push for a management change as part of the CVA process. This may happen if creditors believe the current directors can’t manage the company effectively or have acted irresponsibly.
Will HMRC Accept a CVA?
Yes, HMRC will accept a CVA if they believe it’s in the company’s and its creditors’ best interests. HMRC has published a set of criteria they consider when evaluating CVAs, available at 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 for 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 company’s and its creditors’ best interests.
HMRC has stated that they approve around 70% of CVAs they receive. This suggests that HMRC is generally willing to work with companies struggling financially and is open to considering innovative solutions.
How Does a CVA Affect Employees?
A CVA’s purpose is to allow the company to survive and continue trading. Therefore, the ideal outcome is that it has no impact on employees. However, in some cases, a CVA may involve restructuring, which could lead to redundancies.
Since creditors may or may not agree to a CVA, it’s essential to put together the best possible proposal and be able to reassure creditors who have likely lost trust and/or are angry if you think this is the best option. The best way to achieve these goals is by having the right IP on your side.
Please get in touch to discuss your situation and decide if we are the right people to help you.