A Company Voluntary Arrangement, or CVA for short, is a legally binding agreement between the Company and its creditors, which is designed to allow the Company to continue to trade while it sorts out its financial problems.
In its simplest form a CVA is a “deal” or a proposal that is put to the Company’s creditors, who then have an opportunity to vote to approve or reject the proposal.
A Company Voluntary Arrangement usually takes one of two forms, or potentially a combination of the two.
1. Monthly Payments CVA
This is where a set monthly sum is paid into the CVA for a period of three to five years, in order to offer a dividend to the creditors.
2. A Lump Sum CVA
This is where a lump sum is offered to creditors in full and final settlement. This can be from the sale of unnecessary plant and machinery or a lump sum offer from the directors or perhaps an investor who is coming into the business.
A CVA Proposal is drawn up by the directors with the help of an Insolvency Practitioner and is then sent to the creditors. The law sets out the minimum level of information that must be contained in the proposal but not what the offer to creditors should be. Therefore the offer to creditors can be, within reason, whatever the directors want, provided it offers a better return to creditors when compared to a liquidation.
Accordingly, a Company Voluntary Arrangement is an incredibly flexible tool to enable the directors to sort out the Company’s financial affairs. For example we have previously put forward a proposal whereby creditors were given a choice of whether to take a lump sum in respect of a percentage of their debt, or they could choose to exchange their debt for equity, with the entire debt being paid over a period of approximately 7 to 10 years. This goes to show how flexible a CVA is, and how you can really tailor any proposal to the individual needs of the Company and the creditors.
Another advantage of a Company Voluntary Arrangement is that the Company can also apply for a moratorium which gives the Company a breathing space from creditor action. This gives the Company time to call a decision procedure for creditors to consider a proposal and also to seek their views or modifications to the proposal that has been put forward.
A moratorium has the effect of preventing any legal processes against the Company being proceeded with whilst it is in effect. Bailiffs and sheriffs are not allowed to seize the Company’s assets during this time and even a winding up hearing will be adjourned until after the decision procedure.
At the decision procedure for creditors 75% of those voting must vote in favour of the proposal for it to be approved. The voting rules at the decision procedure can be quite complicated, but if you click on the link we have provided an overview of the procedure and rules can be found on our website.
Once a CVA is approved a creditor cannot pursue their debt outside of the arrangement EVEN if they did not vote or had voted against it. All creditors will be bound by the terms of the Proposal.
Given the financial situation the UK is in, following the Covid-19 pandemic, and that businesses, which were successful before the pandemic, will need time to recover, I anticipate that Company Voluntary Arrangements will become more prevalent over the next twelve months.
If you would like a free meeting to discuss Company Voluntary Arrangements and whether they could assist your company, please contact us on 01326 340579 or email at email@example.com