A Company Voluntary Arrangement (CVA) may provide an ideal solution if your company is facing insolvency or has become insolvent. Cost-effective and confidential, CVAs ensure that you, as a director, remain in control and have a solid chance of saving your business from liquidation.
A CVA
A CVA is a compromise or arrangement made between a company or LLP and its creditors, allowing the company to pay off all or part of its debts over time. They are governed by Part 1 of the Insolvency Act 1986, and an Insolvency Practitioner supervises them.
How Do CVAs Work?
CVAs typically evolve as follows:
- The company or LLP becomes unable to pay its creditors.
- If the organisation falls into administration or liquidation, the administrator or liquidator (usually an Insolvency Practitioner) will examine whether a CVA is a practical solution. Directors can propose a CVA to shareholders if the company is not in administration or liquidation.
- The Insolvency Practitioner or, where the company is not in administration, a Nominee, will work out an ‘arrangement’ covering the amount of debt the organisation can pay and a timescale.
- Creditors are invited to view the arrangement and vote on it.
- The CVA is approved if 75% (by debt value) of the creditors who vote agree to the arrangement.
Below, we discuss setting up and administering a CVA in depth.
Who is Eligible for a CVA?
CVAs can be used by:
- Any company registered under the Companies Act 2006 in England and Wales or Scotland - companies that were ‘existing companies’ before the commencement of the Companies Act 2006 can also use CVAs
- Any company incorporated in the European Economic Area (EEA)
- Any company not incorporated in an EEA member state but has its centre of main interests in a member state (other than Denmark) or the UK
- Limited Liability Partnerships (LLPs)
CVAs provide a solution for most industries. However, they should only be used if you are confident that your organisation’s financial concerns are short-term and you can trade your way into profit over the length of the CVA (typically three to five years). Otherwise, you are simply delaying the inevitable and causing more frustration for shareholders and creditors.
A Suitable Restructuring Solution?
Entering into a CVA allows your company to make critical restructuring changes, such as terminating unprofitable contracts and making redundancies at no cash cost to your business. This makes the process of financial recovery much more straightforward and is one of the main benefits of a CVA.
The Advantages
CVAs offer many benefits for a company, including the following:
- Directors Remain in Control: Unlike in an administration where an Administrator takes control of the business, in a CVA, you, as a director, retain control of the company and manage the CVA.
- Lower Costs: Compared to other insolvency mechanisms, CVAs are less expensive, as the primary fees are to the Insolvency Practitioner who sets up and administers the CVA. Their costs will vary depending on factors such as the number of creditors and the level of negotiation required to reach an agreement on the terms of the CVA.
- Not as Public as Other Insolvency Processes: CVAs do not require publication in The Gazette, as is the case with administration. The fact your company has a CVA will known only to you, your creditors, and the insolvency practitioner.
- Legal Action by Creditors Stays: A moratorium against legal action is put in place during the term of the CVA, meaning no one can issue winding-up proceedings against the company and if winding-up proceedings have been instigated, they can be halted.
- No More Repayment Demands: Creditors, including HMRC, cannot issue statutory demand notices or put pressure on the company to make additional repayments beyond what is agreed in the CVA. In addition, interest and debt charges are generally frozen, making repayments more manageable.
- No Investigation into Directors’ Conduct: As a CVA does not involve the company being liquidated, directors do not have to fear an inquiry regarding their possible negligence and/or misconduct.
- No Calling-In of Overdrawn Directors’ Current Accounts: If your current accounts are overdrawn, you can arrange to make repayments over a period of time. This can be achieved by offsetting a proportion of your salary to get on top of the debt.
The Disadvantages
However, there are cons to be aware of:
- The Company’s Credit Rating Goes Down: The business’s cash flow will be adversely affected, making it harder to obtain credit from lenders and suppliers.
- Obtaining Stakeholder and Creditor Acceptance can be Difficult: To put a CVA in place you will need to get the agreement of at least 50% of stakeholders and 75% of creditors (by value of debt). Although a CVA is normally a better solution for everyone when compared to liquidation, it can be difficult to achieve agreement, especially if the relationship between the company and its creditors has become strained.
- The Agreement may Run for an Extended Period: Three to five years is a long time in the commercial world. You need to be confident that the business can recover during this period, which can result in significant stress and more than a few sleepless nights. Obtaining support from a legal advisor experienced in CVAs can help ease anxiety and worry during the life of the CVA.
- Secured Creditors are Not Bound by the Agreement: Secured creditors, such as banks, can call the administrators even if the terms of the CVA are being met.
How Do I Apply for a CVA?
To apply for a CVA, you must approach an Insolvency Practitioner. To help them ascertain whether a CVA is suitable for your company, they will need to examine documents such as:
- Cash flow forecasts
- Proof of the amount of debt with suppliers
- Details of the company’s standing with HMRC
- The total amount of debt owed
- Your proposed business plan is designed to restructure the business and trade back to solvency
The above information will also assist the Insolvency Practitioner in drafting the CVA proposal (arrangement) to present to creditors and shareholders.
What Happens Next?
Once the proposal is drafted, you need to talk with your secured creditors. Remember, the CVA does not bind them and can force your company into administration, so getting them on board is vital. Meanwhile, the Insolvency Practitioner will lodge the CVA proposal in Court, and the document will be distributed to your unsecured creditors, including HMRC.
Your unsecured creditors will be invited to a meeting (14 days’ notice must be given) where they will have a chance to vote on the CVA proposal. In most cases, this meeting is held virtually.
If 75% (of the value of debt) of the creditors accept the proposal, it will go to a second vote.
The second vote discounts the votes of creditors connected to the company, such as directors or other companies with shareholders who also have shares in your company. At least 50% (of the value of the debt) of creditors must agree to the CVA proposal for it to pass.
If the CVA proposal is rejected, you will need to explore other options, one of which is administration.
How We Can Help
If you're experiencing financial challenges and dealing with insolvency, we're here to provide you with straightforward, practical legal guidance on navigating debt recovery laws and meeting your legal responsibilities. Get in touch with us via email for further information.
FAQ
When does a CVA come into force?
Section 5(2)(a) of the Insolvency Act 1986 states that a CVA comes into force from the date the creditors approve it. Payments will be made monthly and distributed to creditors by the Insolvency Practitioner.
What happens if a CVA fails?
The most common reason a CVA fails is that the company cannot afford to make the agreed-upon monthly payments as per the proposal. A CVA is a legally binding contract; therefore, not honouring the terms of the proposal is essentially a breach of the agreement and may be forfeited.
If you cannot make your monthly payments, you need to talk with the Insolvency Practitioner in charge of the CVA immediately. They can approach creditors to vary the agreement; however, the variation will require a 75% approval vote. Other options include closing the company and/or applying for pre-pack administration or company administration.
