What is a Company Voluntary Arrangement? - How a CVA can help Your Business
Free Company Voluntary Arrangement Advice
If your limited company is insolvent and struggling to pay its debts, you could use a Company Voluntary Arrangement or CVA to assist. A CVA is a legally binding agreement between the Company and its creditors. The main purpose of a Company Voluntary Arrangement is to allow the Company to continue to trade in order to pay all, or a proportion, of its liabilities over a fixed period of time which is usually 3 to 5 years. Typically this will allow a greater return to unsecured creditors than a liquidation, and therefore creditors will hopefully will agreed to it, as they can expect a greater return.
So what can a CVA do for your company? It can be used to:-
- Prevent bailiffs from attending at your premises and seizing goods, which would otherwise prevent the business from continuing to trade.
- Prevent a winding up petition from being issued.
- Prevent a winding up order from being made if a petition has been already issued.
- Prevent legal action from being commenced or continued with.
- Give the Company time to deal with its creditors.
- Simplify the situation for the directors by agreeing just one monthly payment as opposed to paying a little bit to each creditor on a piecemeal basis to keep them at bay.
However, a Company Voluntary Arrangement will not be suitable for all companies and businesses and you will need to work with a licensed insolvency practitioner to determine whether the Company is eligible to put forward a proposal. Some of the key factors to take into account are:
- The Company must be insolvent, which means that either its liabilities exceed its assets, or it cannot pay its creditors as and when they fall due.
- The directors will need to be confident that the business has a viable future and a realistic prospect of recovery.
- The directors and their advisors should have projected cash flow forecasts and a business plan to demonstrate that there will be sufficient profits to cover the agreed monthly payments.
- A good cashflow forecast will be particularly important because it needs to be included as part of the proposal, and creditors will look to critically review that document to make sure that what has been put forward is reasonable and achievable.
Assuming that your company is eligible to put forward a proposal you will then need to consider what "deal" to put to the creditors. The form of the proposed deal will depend on the particular circumstances of your company. Typically however there are two types of CVA, what are as follows:
- A Lump Sum CVA, which is where a set sum is offered to the Company’s creditors in full and final settlement, or,
- A Monthly Payment CVA, which is where a set monthly sum is paid for a period of 3 to 5 years to enable a dividend to be paid to the Company's creditors.
In order for a proposal to be approved more than 75% of those creditors who vote on the proposal must agree, once that threshold has been reached, all creditors will be bound by the terms of the proposal.
Accordingly, once approved and implemented, creditors cannot take any enforcement action outside of the CVA, even if they voted to reject the Company’s proposals or did not vote at all. This is one of the main benefits of a CVA, particularly if there is one creditor who is being particularly difficult or unreasonable, to the detriment of the other creditors and company.
A CVA Proposal is drawn up by the directors with the help of an insolvency practitioner to ensure that the proposal meets the requirements of the Insolvency Act 1986 and The Insolvency (England and Wales) Rules 2016.
A copy of the CVA proposal is then sent to all known creditors of the Company, whether secured or unsecured, and a decision procedure of creditors is called. Usually when putting forward a Company Voluntary Arrangement a virtual meeting of creditors would be the most appropriate decision procedure to use.
It is at that virtual meeting that the proposal is considered by the Company’s creditors.
The information to be presented at the virtual meeting is typically the same as that which can be found within the CVA proposal document. For that reason creditors often choose to vote by post, rather than attend the meeting in person, and will vote to either:
- Accept the proposal as it is,
- Reject the proposal, or,
- Accept the proposal, subject to a number of modifications.
While the law sets out the information that must be contained in a CVA proposal, it does not set out what the offer to creditors should be. Accordingly a Company Voluntary Arrangement is extremely flexible and can be adapted to suit a company's individual needs and the expectations of its creditors.
The index to the left hand side of this page refers to two distinct types of CVA, as follows:
- A Company Voluntary Arrangement without a moratorium, which was introduced into law by the Insolvency Act 1986, and,
- A Company Voluntary Arrangement with a “moratorium”, which was introduced into law by the Insolvency Act 2000 but only became available for use as and from the 1st January 2003. A moratorium gives company directors powerful options when their company is under stress, as during the period in respect of which the moratorium is in place, creditors cannot take enforcement action against the Company. This breathing space from creditor action allows the directors time to formulate a way forward which will hopefully provide a better result for the creditors, employees, and stakeholders as a whole, than if the Company were instead to be liquidated.
By reading the following case studies you will see that there are many different ways to structure a CVA:
- Company Voluntary Arrangement - Case Study 1
- Company Voluntary Arrangement - Case Study 2
- Company Voluntary Arrangement - Case Study 3
A CVA with or without a moratorium, could help your company avoid the consequences of statutory demands and winding up petitions as well as other types of creditor enforcement action.
Furthermore, an approved CVA will relieve your company of creditor pressure as it will draw a line in the sand in so far as historic debt is concerned.
Another benefit of a Company Voluntary Arrangement is that the directors no longer have to deal with the creditors, therefore allowing them time to focus on more important work such as continuing the run the business. It also allows the directors to retain far more control over the Company and business than any other insolvency option.
The Insolvency Practitioner involved will be acting as a Supervisor, and as the name suggests, his or her role will be to supervise and monitor the Company during the CVA period.
A CVA will often be a cheaper and more a cost effective solution when compared to other insolvency options.
As the Company is continuing to trade, the Supervisor is not required to investigate the affairs of the Company and the conduct of the Company's directors; furthermore no report to The Insolvency Service is required.
If you would like a free no obligation meeting to discuss how a Company Voluntary Arrangement could help your company, please contact Chris Parkman of Purnells on 01326 340579 or by emailing email@example.com.