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Here we discuss what a Company Voluntary Arrangement (CVA) is, how this could help your business when facing insolvency and how The Insolvency Experts can support your business during this tumultuous time.
Table of contents
- What is a CVA?
- Who is eligible for a CVA?
- Advantages and disadvantages of a CVA
- What steps are involved in a CVA?
- How does a CVA work?
- What is the cost of a CVA?
- How long does the CVA process take?
- Does the CVA process affect employees?
- How does a CVA compare with Liquidation and Administration?
- What actually happens when a company goes into a CVA?
What is a CVA?
A ‘CVA’ is a Company Voluntary Arrangement with creditors which allows the business to pay off its debts over a fixed period of time. It is an insolvency process that allows for company rescue, as opposed to total sale of the business and assets. The business continues to trade as normal and is protected from creditors taking action against it. Creditors tend to support businesses choosing to enter a CVA as the other option may result in little or no repayment of what they are owed. The CVA however must be reasonable and achievable.
The CVA proposal:
- Must be reasonable and achievable.
- Must be approved by 75% of creditors.
- Must be approved by more than 50% of the company’s shareholders.
If there is a difference of decision between the creditors and the shareholders the decision of the creditors will take precedence, subject to any order of the court. If approved, the CVA forms a legally binding agreement that binds all creditors to the agreement, regardless of whether they voted in support of or against the CVA.
Who is eligible for a CVA?
A CVA is specifically for limited companies and used when a company is insolvent. There has to be an Insolvency Practitioner involved in the process to ensure the correct procedure is adhered to. The Insolvency Experts can provide a qualified and professional Insolvency Practitioner to help you with the CVA process.
To be eligible for a CVA, your company must be registered under the Companies Act of 2006. This is the main piece of legislation that lays out company law. You must also be able to prove that your company’s future capital is capable of repaying the debts that you currently owe. If this is the case, a CVA is likely to be accepted as there is a high probability that your company will be feasible post-CVA.
If your company is in the liquidation process or in an administration, the respective liquidator or administrator is responsible for proposing a CVA and not the directors or company owner/s.
Is your business suitable for a CVA?
The main way that you can decide whether your business is suitable for a CVA, is to look at the future of your company. Does your business have viable future prospects and profit? Are these goals attainable? You must be able to prove that your business could feasibly pay off its current debts in the near future, showing that the help you need from a CVA is only temporary and necessary at this current time.
It is important that you understand your current situation and can explain the reasons behind your debt levels and necessity for a CVA. This will increase the likelihood of your CVA application being approved by creditors and shareholders.
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Advantages and Disadvantages of a CVA
Advantages of a CVA:
- If approved, it acts as a legally binding agreement for all creditors
- It allows you to settle historic debt over a set period, often at a reduced amount
- The company remains under the control of existing management and continues in its current form, both during and following conclusion of the CVA
- It enables your existing contracts to be retained
- It is less public than Liquidation or Administration
- Can help retain jobs that would otherwise be lost in an Administration or in Liquidation
Disadvantages of a CVA:
- Your business’s credit rating will be negatively affected
- The process can be lengthy- there will be a fixed term that requires you to adhere to monthly payments, usually lasting for a few years
- The CVA could be rejected by creditors and/or shareholders
- There is no guarantee that your business will be completely viable after the CVA has been completed, Liquidation or Administration could still happen in the future
- There may be some undesirable terms enforced by creditors or your CVA advisor (e.g dropping contracts, redundancies)
What steps are involved in a CVA?
At The Insolvency Experts, we can assist with reviewing the financial affairs of your company, together with future forecasts and projections, to ascertain whether a CVA is right for you. It is important that you involve an Insolvency Practitioner immediately when considering a CVA to ensure that you have the right levels of support and professional guidance.
We would only seek engagement to act in respect of a proposed CVA, if we are confident that not only does the proposal have a reasonable chance of approval, but also that it is feasible for the future of the business.
Whilst it is understandable to be worried about the reaction of creditors when proposing a CVA (particularly if they are not to be repaid in full) generally, their support will ensure that a better return to them is generated than if the CVA is not approved and the company is forced into Liquidation. As a result, providing the proposal is fit, fair, feasible and it is demonstrated that this is the maximum the company can afford, many suppliers will seek to support your company through the CVA.
Meeting and Approval
A CVA requires the support of 75% of its creditors by value in order to be approved. In addition to the preparation and circulation of the CVA proposal, at The Insolvency Experts, we seek to liaise directly with your company’s creditors, to address any concerns they may have, but to also reiterate the benefits and increased return to them via a CVA.
Providing the requisite majority of creditors approve the CVA, it becomes a legally binding agreement for all creditors, irrespective of those who may have voted against it. As long as the terms of the CVA are fulfilled, together with meeting any future obligations on time, once the CVA has been concluded, any shortfall in respect of CVA creditors is written off and the company exits CVA and continues as before.
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How does a CVA work?
A CVA begins with the 3 steps listed above, Assessment, Proposal and Approval. Once a CVA has been approved, the next steps are to implement the terms of the agreement into your business. This could include restructuring debts, exploring redundancies if needed and reviewing existing contracts with the possibility of terminations.
The final outcome of a CVA will ideally be your company being free of debt. Though sometimes companies can run into problems with a CVA, the typical outcome allows the company to continue trading without debt repayments and plan independently for the future in terms of goals and projections.
What is the cost of a CVA?
We have a useful tool on our website that allows you to get a quote for a CVA based on a few facts. These include:
- Number of creditors
- Amounts owed to bank, HMRC and others
- Estimated value of company assets
How long does the CVA process take?
The CVA process can vary massively. There are many factors that can alter the proposed timeline and potential problems could pause proceedings. It is important to consider all factors when you are informed of a time scale and be aware that this is subject to change.
Does the CVA process affect employees?
A CVA can and most likely will affect employees. Redundancies may be a necessary action taken by the CVA advisors to reduce costs and plan for debt repayments. This is always a difficult process but CVA advisors can help with informing your staff of redundancies.
Where redundancies can be avoided, they will. It is not always a necessary step but it is usually one of a business’s biggest expenses and scaling down a company can result in staff cuts. Government schemes will fund the redundancy packages for eligible employees when a company is entering a CVA, so there is comfort in knowing that employees can recuperate.
It is important to remember that not all employees will be affected by a CVA, as your business should still have viable future prospects. You may lose staff due to the CVA process, but the CVA attempts to ensure that your remaining employees have a potentially profitable business with a positive future to continue working for.
How does a CVA compare to Administration and Liquidation?
CVA vs Administration
In a CVA, the directors retain full control of the company and its operations whereas in an administration, the appointed administrator has control. A company can also continue trading and run day-to-day as normal- this helps to retain a customer base and possibly, key contracts. An administrator however, can choose to cease trading immediately. You won’t be assessed as a company director under a CVA, but an administration would require management investigations.
CVA vs Liquidation
In liquidation, your company would cease trading and have no further debts. These debts will be paid through assets being sold, remaining sales and staff cuts. A CVA will aim to avoid most of these actions. Similar to an administration, liquidation requires director/management investigation, unlike a CVA. The most important difference between the two is that liquidation is a complete way out of a company, whereas a CVA attempts to ensure future prospects and seeks to promote a viable business plan.
What actually happens when a company goes into a CVA?
When a company enters a CVA, all the creditors and shareholders who voted against the CVA (or did not vote entirely) are bound by the terms of the agreement until its proposed completion. Ongoing legal actions in reference to your company will automatically cease and your only repayments will be in accordance with the proposed payment plan.
You will still remain in control of your business and its day-to-day operations. The employees not susceptible to redundancy will continue working as normal, though they should be informed of the ongoing process. Your customers however, do not need to be informed of the CVA.
In simple terms, once a company goes into a CVA, they will:
- Have to repay agreed debts in accordance with the payment plan
- Potentially cut some contracts, e.g. surplus suppliers
- Have to make necessary employee redundancies
- Follow all repayments and proposed changes for the agreed upon time scale
How likely are my creditors to accept some form of voluntary arrangement?
If your limited company is insolvent, it can use a CVA to pay creditors over a fixed period. If creditors agree, your limited company can continue trading. A CVA may be the ideal way to protect against legal actions taken by creditors. The terms of a CVA are likely to improve cash flow as creditors are bound by a contract which often reduces monthly outgoings.
When negotiating a voluntary arrangement, a full disclosure of the debtor’s assets must be made- it is a criminal offence not to disclose this information fully. The debtor must make an honest attempt to present a fair offer to the creditors. This offer is more likely to be approved if the outcome is better for creditors than the alternatives.
The relationship you have with your creditors can significantly influence the outcome of the proposal- it is therefore crucial that discussions with these creditors are undertaken in a professional manner. If you believe that your business has a future, but needs some breathing space from pressing creditors, contact our team today to discuss this process. The earlier you make contact, the more we can help you.
Getting a CVA accepted with The Insolvency Experts
A Voluntary Agreement Proposal will be created by an Insolvency Practitioner based on the finances of your business. This is then put to your creditors, with 75% approval required for it to be accepted. It then must be sanctioned by your shareholders before it can be implemented. A trust account is set up for payments to be made into and for creditors to be paid from, if everything has been agreed.
A CVA can buy time for you to improve cash flow and it can help you to retain the services of key members of staff to ensure that you have got the best chance of keeping your business solvent. With the number of businesses facing insolvency set to rise further, it is important for those facing these issues to consult with insolvency specialists to give their business the best chance of survival and success.
Contact The Insolvency Experts for CVA advice
For any more information on company voluntary arrangements, please get in touch with The Insolvency Experts now. We can help you to keep control of your business and avoid a winding-up petition. Contact The Insolvency Experts online or call us directly on 0300 303 8284 now.