CVA Definition, Benefits, Process & Risks
Is your business being dragged down by old debt? Do you want to buy time to pay off creditors? Are you looking for a release from the pressure so that you can re-energise the business?
If your company has a bright and viable long-term future but is being strangled by historic debt – with ever increasing tightening of today’s cash flow – a CVA may be the best option to take your business forward.
A CVA provides a popular and realistic alternative to company closure for an insolvent limited company; it gives directors the opportunity to trade through a difficult period by bundling up old debt and deferring payments to creditors. Upon conclusion of the CVA, the company is free from the burden of its historical liabilities – making it once again profitable for and valuable to shareholders.
To stand a chance of success, a CVA must be fit, feasible and fair:
- Fit to be proposed to, and considered by, the company’s creditors
- Capable of being achieved within the proposed timeframe
- Fair to both the company and its creditors
Whilst a CVA presents a sound opportunity to save your business and maximise creditors’ interests, it is essential to act promptly.
A Company Voluntary Arrangement (CVA) is a legally binding agreement between a company and its creditors to repay as much as can be afforded over an agreed period of time.
It is a powerful tool used to rescue limited companies in the UK that are insolvent yet have an underlying business that would be profitable in the future without the burden of old debts.
Combining an element of debt deferral and debt excuse, a Company Voluntary Arrangement gives a company an opportunity to not only buy some time to pay back creditors but also often results in a reduction in the amount outstanding.
Key features of a Company Voluntary Arrangement:
- Director-led process
- Directors appoint an authorised Insolvency Practitioner as their nominee
- Proposal made to creditors for repayment over an extended period
- Creditors vote on acceptance at a creditors’ meeting
- >75% in monetary value required
- No mandatory repayment time frame or repayment amount
- Proposal usually based upon a monthly contribution from future profit for up to five years
- Payments supervised by the appointed Insolvency Practitioner
- Company continues to trade under the control of company directors and management
However, it should be noted that a Company Voluntary Arrangement is not suitable for all business structures or specific insolvency circumstances.
Why not contact us for some free, impartial advice to establish if a Company Voluntary Arrangement is the best option for the survival of your company? If it is not, then we can advise you on some suitable alternatives for company insolvency.
If your company has a viable future, but current cash flow problems have resulted in mounting pressure, a CVA may present the ideal framework for change and a fighting chance of survival.
There are many ways in which a business can benefit from a CVA:
- Flexible but formal method of business recovery with a pre-defined timescale
- Enables the business to continue trading
- Cheaper than Administration
- Personal Guarantees are usually not ‘called in’ and can be removed once the debt is cleared
- No Pre-pack so no need to buy back any assets
- Existing finance can usually be left in place
- Deferral of payments eases cash flow pressure
- Flexible repayment structure based on what you can afford
- Improves the creditors’ position as continuation of trade offers a better outcome than company closure or Liquidation
- Provides court protection to the company whilst the CVA proposal is being considered
- Moratorium on any further legal action by creditors (such as court action or winding up procedures)
- Provides opportunity for company to restructure, removing unprofitable areas
- No cash redundancy costs as employees can make any outstanding claims against the Redundancy Payments Office
- Historic debts are frozen, meaning that no further interest or costs are accrued
- Company remains under control of directors with minimal intervention from the CVA supervisors
- No reports are submitted on directors’ conduct
- Upon successful completion of the CVA, the balance of debt not repaid is written off
The most attractive benefit of a CVA is that, if successful, the company survives – saving jobs, returning value to creditors and offering a realistic prospect of a return for shareholders.
The company directors start the CVA process by instructing a Licensed Insolvency Practitioner to help propose a CVA to the company’s unsecured trade and tax creditors. If they cannot be paid back in full, a ‘pence in the pound’ offer can be made. However, this will need to be supported by a detailed business forecast.
CVA approval process explained
The CVA proposal is subject to a vote by the creditors as to whether or not they wish to accept the offer. A Creditors’ Meeting is called; few creditors actually attend in person as most voting is by proxy.
In order for a CVA to be approved and made binding on all creditors, two voting percentages are required:
- 75% of unsecured creditors by value who vote on the day must approve the CVA
- 50% of non-associated creditors (i.e. those not associated with the company) by value must also vote in support
The total timeline for the CVA process is typically 28 days from the outset, but it can take up to three months.
How does a CVA work?
If the proposal is accepted, a supervisor will be appointed to ensure that the company adheres to the CVA rules.
Typically, a monthly contribution from ongoing trading profits is made into the CVA, and some assets may also be sold. The proceeds are then distributed to creditors on a monthly basis or as a lump sum. No further interest or costs are accrued because debts are frozen.
If you would like the CVA process explained in more detail, or are confused about any of the rules, please contact us to speak to one of our Licensed Insolvency Practitioners.
A CVA proposal is not always guaranteed to work. Although it is an extremely effective rescue tool for a company in distress, its success depends both on the structure and the amount of pre-planning – plus sometimes an element of luck.
In order to be successful, a CVA proposal requires the following:
- A viable business that can demonstrate past profitability and cautious forecasts in a strong market
- Recognition by the directors and management team of the need for change
- Commitment to fight hard for the company’s survival
- Availability of appropriate funding
It should be noted, however, that building a CVA proposal and getting it approved is generally the easiest part of a business turnaround. Actually making it work is far more difficult than simply liquidating the business, and needs expert help from professional advisors.
Continuation of trade
Company directors are legally obliged to aim to maximise creditors’ interests. A CVA proposal enables you to do this by continuing to trade, which depends on your ability to retain key contracts, key suppliers and key staff.
Once the deal has been proposed, you will need to decide who to tell based upon your business knowledge. It is often better to take a risk by being open and honest – so that stakeholders hear it from you rather than via exaggerated rumours on the ‘grapevine’.
Most customers will stick with you as long as you continue to deliver your products or services. Creditors will usually be supportive of a CVA as it is ultimately in their best interests, even if they don’t like losing the money owed. Employees will risk losing any rights or benefits if they walk out, even though some jobs may inevitably be lost as a result of restructuring.
If, despite continuing to trade, you are unable to keep up with the contributions, you can either try to flex the timing of payments through leeway built into the proposal or suggest varying the terms of the CVA. If this doesn’t work, the company will pass into Liquidation.
To find out more about how a CVA could benefit your business, contact us today for some free, no-obligation advice.
When a business hits problems, it may be able to trade through but this is dependent on strong future orders, negotiation with creditors or refinance.
Decreasing sales, reduced profit margins or increasing overheads are likely to lead to a tightening of cash flow. Despite positive signs of future trading, pressure from creditors (i.e. chasing letters, court enforcement or bailiff action) may increase as arrears begin to accrue. Early detection of these problems is essential as throwing more money at it only defers the inevitable: insolvency.
When a company starts falling behind with payments due to suppliers, HMRC, financiers or staff – with no clear opportunity to get back on terms – a formal insolvency process such as a CVA may be needed.
Corporate insolvency options
There are four principal types of corporate insolvency, all of which (except for Compulsory Liquidation) can allow for the survival of a business:
- Compulsory Liquidation
- Creditors’ Voluntary Liquidation (CVL)
- Company Voluntary Arrangement (CVA)
- Company Administration
We are always keen to make sure that as a company director you are absolutely clear on all the insolvency routes available to you. If your company has a viable future, but is being strangled by historic debts, a CVA may be the best solution.
As a formal method of business recovery a CVA provides protection to the company and allows the business to continue to trade, while enabling a better outcome for creditors than company closure or Liquidation.
But a CVA doesn’t suit all business structures and insolvency situations, so please contact us in order to consider all other possibilities available to you, including Pre-Packs, Phoenix Companies and Business Restarts.