Amongst the many options there are for small businesses looking for financial help in times of difficulty is the company voluntary arrangement (or CVA). But what is a CVA? What are the advantages and disadvantages? And who’s eligible?
We’ve taken a look in our plain English (jargon free) guide to CVAs.
What is a CVA?
In short, a CVA is a legal binding agreement between a company and its creditors (those it owes money to). CVAs are designed to help the company pay its debts over a set period of time (usually between 3 and 5 years) in a more manageable way and to also increase the chances of creditors getting their money back.
It’s worth noting that a Company Voluntary arrangement is a legally binding contract that must be approved by the creditors and the court. The arrangement usually involves the company paying a proportion of its debt, often with a reduced interest rate, within a set period of time.
In some cases, creditors may also agree to accept a reduced settlement of their debt. This can be beneficial to both parties, as the company can avoid insolvency and the creditors have a greater chance of recovering some of their money.
Is my Company Eligible for a CVA?
A Company Voluntary Arrangement is undoubtedly an effective solution for struggling business to repay their debts and continue to be able to trade. However, it’s not suitable for everyone. Some businesses are not eligible for CVAs. So let’s look at some of the eligibility criteria.
- Your company must be insolvent to be considered for a CVA (or contingently insolvent)
- Both the company directors and the appointed insolvency practitioners have to have confidence in the ability of the company to be turnaround around. Both parties must believe the business could have a viable future
- There must be cash flow forecasts and other relevant projections to show how the CVA’s repayments will be met. All parties must be confident that the company can fulfil its obligations once a CVA is in place
What are the Advantages and Disadvantages of a CVA?
As with anything, a CVA has both its pros and cons. So let’s take a look at the advantages and disadvantages of a company voluntary arrangement:
| Advantages of a CVA | Disadvantages of a CVA |
| A CVA can, in some cases, reduce the overall levels of debt | Entering into a CVA will have a negative impact on your company’s credit rating |
| It simplifies your company debt into one single monthly repayment that is affordable | 50% of stakeholders and 75% of creditorsmustagree to the CVA so it can sometimes be difficult to obtain the agreement required from all parties |
| It takes pressures of aggressively chasing creditors | As it’s a legally binding agreement, failure to meet the payments can result in creditors taking legal action against your company |
| The company’s directors retain control of the business throughout the duration of the CVA | |
| A CVA is not publicly listed or published anywhere, so nobody need know you’re in one (unlike if your company goes into administration) |
What’s the Process of Applying for a CVA?
If you think a CVA might be the answer to your company’s financial problems, here’s the process involved in applying:
- Contact an Insolvency Practitioner. A good insolvency practitioner will be able to advise on whether or not a CVA might be the right solution for you
- Appoint the Insolvency Practitioner to draft a CVA proposal.
- Company directors consider the proposal. Company directors should be considering the affordability of the plan for the duration of the CVA and at this stage any uncertainties should be addressed. The proposal may be accepted as is by company directors or amendments may be made
- The CVA is then filed with the court. A company voluntary arrangement is a legally binding agreement and must be filed with the court. It will be given an originating number. The proposal is then sent to the company’s creditors for consideration. It is essential that the proposal is sent a minimum of 3 weeks before the creditors’ meeting
- Creditors’ and Shareholders’ Meetings take place: The Insolvency Practitioner will hold a creditors’ meeting in which a creditor (or their representative) can accept, reject or request revisions to the CVA proposal. Simultaneously (but separately to the creditors’ meeting) a shareholders’ meeting takes place.
- Creditors and shareholders vote. They’re voting on whether or not to accept the proposal. 50% of shareholders must agree and 75% of creditors must agree in order for a CVA to go ahead.
- The insolvency practitioner issues a report (in the event of acceptance). The meeting chairman, which is generally the Insolvency Practitioner) has 4 days from the meetings to issue a report summarising what happened during the meetings, the outcome of these meetings and how everyone involved voted.
What happens if a CVA proposal is rejected?
In some cases, a CVA proposal may be rejected or fail to acquire the 75% creditor approval.
There are all sorts of reasons for this. Some creditors may feel unfairly treated or may feel they’d fare better if you didn’t start a CVA. In some cases, creditors may prefer the conduct of directors in investigated through a different process.
Whatever the reasons, if your CVA proposal is rejected, there are a few next step options. These include:
- Administration: In this case, an administrator essentially take charge of your limited company. Their objective is to ensure creditors get as much of the debt you owe paid off. While administrators go about this, a moratorium is put in place – essentially something to prevent any legal action being taken against the company. Assets could be sold off or the company may be able to continue in a bid to generate money to pay off creditors
- Creditors Voluntary Liquidation (CVL): Essentially, this marks the end of the company’s ability to trade. Trading ceases and assets are liquidated in a bid to raise money to pay off creditors. For the company’s directors, a Voluntary Liquidation is preferable to a compulsory liquidation because the latter will require an investigation in directors’ conduct
Is a CVA right for you?
Speak to an Insolvency Practitioner. If you’re concerned about your company’s finances and fear you may be insolvent, an IP will be able to advise on the potential solutions for you.
