Company Voluntary Arrangements (CVA) are frequently sought by Directors who feel their company has a viable future and are prepared to work hard to keep it alive.
What is a Company Voluntary Arrangement or CVA?
The Company Voluntary Arrangement (CVA) was introduced by the government in 1986. Its intention – offering an alternative procedure to companies that would otherwise face Compulsory Liquidation or Voluntary Liquidation. The use of a CVA can be a rescue device following a period of administration. Companies looking for a way to repay creditor debt whilst continuing to trade seek CVAs.
The CVA procedure is available to any company registered in England or Wales. It enables the company to reduce its debt levels, improving cash flow by coming to an arrangement with its creditors. The company normally makes only one agreed, affordable monthly payment to the appointed insolvency practitioner. He acts as supervisor distributing the money on a pro rata basis amongst the creditors included in the CVA. The amount paid over the agreed term, up to five years, can vary, from a repayment in full to repayment or a percentage of the debt.
CVAs can be an excellent way to solve serious debt problems, in sixty months or less, the company can be legally debt free. There should be a write off of any outstanding debt, once the CVA is successfully complete.
Wilson Field will work with you to understand your company’s debt levels; we will then establish a level of debt you can afford to pay back.
Why use a CVA?
A CVA is the ideal rescue device for an insolvent company which has accumulated debt with creditors. It helps find a way to repay its liabilities and continue trading. Companies usually seek to enter a CVA in order to avoid liquidation or to remove creditor pressure.
When will a CVA be most effective?
- Your company is facing liquidation but would prefer not go down that road.
- You want to make sure suppliers do not lose monies owing to them.
- Your company has the potential to be profitable by the removal of creditor pressure.
- Your company has bad debts or late payers affecting its short-term financial health.
- Your company has a viable business model and a full order book. It is being held back by short-term cash flow problem.
- Your company requires restructuring to be successful.
- You have been unable to negotiate repayment plans with creditors.
- You want to retain day-to-day control of the company.
Benefits of a CVA
A CVA has a number of advantages, not just for its creditors, but also for company’s directors and shareholders.
- There are no upfront fees. Other company rescue solutions, such as pre-pack administration, may require a significant upfront investment. Fee charges for a CVA refer to the implementing and managing the arrangement. Contributions usually pay for these before distributing to creditors.
- Once the CVA is set up the company is protected from the initiation or pursuing of legal action such as country court judgements (CCJ’s) or winding up petitions. The business receives protection from unsecured creditor pressure.
- Approval of the CVA will see the business in a more stable financial position.
- The company pays just one affordable monthly payment to the insolvency practitioner who acts as supervisor and distributes payment equally among your creditors.
- No interest or charges from historic debts included in the CVA can be added from the date of approval.
- The core business may continue to trade; this provides the company’s employees and directors with employment.
- In most cases, a CVA is a cost effective alternative to other insolvency procedures. It is available to a company with financial difficulties, much like administration or receivership.
- At the end of the CVA term, there is the writing off of any outstanding unsecured unpaid debt, even liabilities to HMRC.
CVA offers a wealth of benefits to a company experiencing financial difficulties. A well-structured CVA can result in a company reducing its monthly outgoings, improving cash-flow and reducing the overall amount of unsecured debt owing. This means the saving of a business that could otherwise have gone under. The company’s creditors may receive repayment of more of the money owing to them, something that may not happen if the business simply had to cease trading. It also means employees stand a better chance of retaining their jobs.
The main advantages of a CVA
The purpose of a CVA is to help struggling businesses and they are relatively flexible arrangements. If your company’s situation changes and it is struggling to meet repayments, a variation to the CVA may be put to creditors. If accepted, the monthly CVA repayment could be reduced for a set period, or a payment holiday permitted. The intention behind these variations is to help companies deal with changes in circumstance.
Consequences of a CVA
There are many advantages of a CVA for companies struggling financially. However, it is also important to consider the consequences before deciding how you should proceed.
- There may be a failure of the CVA if no changes are made to the existing business model. There is an old saying, “if you keep doing what you’ve always done, you’ll keep getting what you’ve always got”. If your company continues making the same mistakes, it will end up in the same position in the future.
- A CVA is a formal agreement and to ensure against failure, adhering to the terms in the CVA proposal are crucial. Not adhering to the requirements of the proposal will likely lead to Voluntary or Compulsory Liquidation. This can in turn expose directors to the possibility of wrongful trading action.
- Whilst there is an element of flexibility, CVAs can be quite rigid, after all, they are legal schemes. In general, the CVA terms will be quite strict in what it expects the company to pay and over what period.
- During the first few years of the CVA period, it will be difficult or impossible to get credit. You may have to pay for goods or services on a pro-forma invoice basis or cash on delivery. This is while you build up goodwill with your suppliers.
The main disadvantage of a CVA
Companies House will register the fact the company is entering into a CVA and there will be a recording of it on its credit file. This means it will be more difficult for the company to set up credit accounts or borrow money while in this structure.
Another overlooked implication is how the information on the company’s credit file can affect new business relationships in the future. Many companies who are looking at doing business with you will check the financial viability of the company before working with you. The fact a CVA is in operation may mean that they feel that it represents a risk. So they may refuse to do business with your company.
The process of a CVA
- Discuss options with an insolvency consultant
- The first step is to investigate your options with a professional insolvency consultant at Wilson Field. We will discuss your company’s current position, explaining the various options available. These include Voluntary Liquidation, CVA or Pre-Pack Liquidation. We will work with you to find the best solution.
- Face to face appointment with a consultant
- The next step is a face-to-face meeting. One of our insolvency specialists can meet you at your home, your place of work or a convenient location of your choosing. At the meeting, we will discuss your options in further detail and more depth. This initial consultation and advice are completely free of charge.
- Gathering information
- Once Directors agree a CVA is the best solution to your company’s financial difficulties, Wilson Field needs to be formally instructed to work on your behalf. Once instructed, our CVA team will work with you collating the relevant information necessary for CVA proposal drafting.
- Drafting the proposal
- The proposal details a number of things including:
- The history of how the company got into financial difficulty and how it will avoid future problems.
- How much a company can afford to pay each month and how much will be paid to creditors.
- Information regarding the company’s current financial position.
- The duration of the CVA.
- After drafting, the directors can discuss and review the proposal. They can and should make amendments where applicable until it is acceptable. A copy is sent to creditors and shareholders once it is signed off by the director.
- CVA Moratorium
- If creditor pressure becomes a worry during CVA set-up, an application may be made to the court for an official CVA Moratorium. Once in place, your company’s creditors will no longer be able to take any legal action. This effectively acts as breathing space for the insolvency practitioner. Allowing them to hold a creditors meeting for them to vote on the CVA proposal. Formal CVA Moratoriums are useful but their use is rare. This is due to the risks involved for the insolvency practitioner and their difficult implementation in practice.
- Informal Agreement with unsecured Creditors
- As an alternative to CVA Moratorium and to avoid legal action by the creditors against the company before the CVA is agreed, we favour informal agreements between the debtor company and its major creditors. After instruction our first task is to contact all of your unsecured creditors advising them about the CVA plan. We inform them that the company has financial difficulties. As such, the company cannot afford to pay its historical liabilities.
We explain that the company is exploring the possibility of a CVA and in the meantime, the company needs to continue trading. We inform them that you will still need to buy products or services from them but will do so on a “cash on delivery” or “pro forma basis”. We then ask them for their help in giving you some breathing space to allow us to prepare a proposal.
You can continue to trade with your creditors on a cash basis. This will prove the company is a going concern which will be meeting obligations. The likelihood of accepting a CVA will be stronger if creditors have some faith in the company to keep up monthly payments.
- The Creditors Meeting
- By law, creditors and shareholders have to be given a minimum 14 days’ notice of a creditor’s meeting.
A company director should attend, but it is not obligatory. Creditors have the opportunity to vote in favour or, against your CVA proposal. They can vote in person, or by proxy. Voting by proxy means they can vote via a third party, by post or e-mail. At least 75% of voting Creditors need to vote in favour of your CVA proposal for approval.
In some cases, the proposal may not be acceptable to creditors and a revisited proposal incorporating modifications may have to be resubmitted for their approval.
In addition, there will be a second creditors vote, taking place without ‘connected’ creditors present. For the proceeding of the CVA, this requires at least 50% of voting creditors to be in favour. Connected creditors are usually individuals, such as company directors or employees, who provide unsecured finance to the company. They are not generally eligible for a dividend from a CVA. To prevent connected creditors from ensuring the CVA is approved, they are not included in the second vote. As this is something which may not be in the interest of all the other creditors.
- Your CVA will begin
- Once your company’s CVA is in place, the monthly payments already in agreement will start. The collection of money is on a monthly basis distributing amongst your creditors on a pro-rata basis, normally annually. A CVA is a legally binding agreement, and its terms bind your creditors and your company for its duration. Creditors will not be able to legally pursue you as long as your company makes the regular repayments each month.
- End of your CVA
- The CVA finishes at the end of the CVA term, after final payment has been made and all proposal condition have been adhered to. Most CVAs are on five-year terms meaning they conclude after the 60th monthly payment. At that point, any outstanding unsecured debt will be written off, and your company will be legally debt free.