Company Voluntary Arrangements ("CVA")
This is a legally binding agreement between a Company and its creditors. The process is effectively overseen by the court but the court's involvement is usually limited to receiving documents relating to the CVA.
A CVA usually takes the form of the business being allowed to continue to trade and make monthly payments to an Insolvency Practitioner (known as the Supervisor of the arrangement). These payments are then paid to the creditors to discharge the amount they are owed.
A CVA usually lasts between 3 and 5 years and allows a company to wipe the slate clean. After its completion any amounts not repaid to creditors are legally written off and creditors have no legal recourse to the company.
Typically a CVA will offer creditors a return of anything between 25p and 100p in the £. On occasion a CVA may swap the debt of the business with an equity stake or may involve a third party investor making a formal full and final settlement of the debts.
A CVA may be suitable if:
The problems with the business have been addressed so that the business is or will be profitable in the future;
The business has cash flow difficulties resulting from its history;
The business can offer creditors a credible solution to the problem that results in a better outcome than the alternatives of liquidation or administration;
The key stakeholders in the business support the process; the funders, employees and key suppliers;
Other processes will significantly damage the viability of the business; and
The business has future funding and sufficient working capital to enable it to trade (for example on a proforma basis with creditors).
The CVA Process
If a business is experiencing significant and urgent pressure then it may be possible to obtain protection from action whilst a CVA is put to creditors. A moratorium is available to small companies, which provides protection from winding up petitions and other legal and recovery action. If the company is not small then such protection may be obtained by first placing the company into Administration.
The process is driven by the directors of the company who draft a proposal to put to creditors. In reality such an agreement is drafted by an Insolvency Practitioner or Lawyer due to the complexity and statutory requirements that must be met.
As part of the proposal a statement of the business's assets and liabilities (Statement of Affairs) will also be prepared along with trading forecasts.
Once the proposal has been prepared the Insolvency Practitioner, at this stage known as the Nominee, writes a report on the proposal for the benefit of the court and creditors.
These documents are filed in court before circulating to the creditors of the business. Meetings of creditors and shareholders is also arranged for considering the proposal.
A meeting of creditors is then held. At this meeting the proposals may be approved as they stand, rejected or creditors may propose modifications to the proposal. In order for the CVA to be approved more than 75% in value of those creditors that choose to vote must vote in its favour. A meeting of shareholders is then held to approve the proposal.
Once approved, the CVA is binding upon all creditors of the business. The management of the company then fulfil the obligations under the proposal.
These obligations usually involve making payments to the Insolvency Practitioner, known as the Supervisor following approval. These payments are then used to pay the costs of the process and make distributions to creditors.
Once completed, usually after making 3 to 5 years of contributions out of profit, the CVA is complete and the company is discharged from its debts.
In the event that the Company cannot meet the obligations of the proposal the CVA will fail. This may result in the liquidation of the company.
Advantages of a CVA
Allows the current shareholders of the business to preserve control and their investment, albeit any benefit will normally be deferred until the CVA has completed;
It should offer a better outcome to creditors than the alternatives;
Although a matter of public record, there is not normally a requirement for customers to be notified;
The decision of more than 75% of those that vote binds in all creditors;
The insolvency practitioner appointed does not prepare a report on the conduct of the directors, which in other procedures is used to determine whether they should be disqualified from being involved in the management of a company;
It can offer a viable solution to the business's problems through cost reduction. For example exiting onerous lease commitments or restructuring the workforce (in a CVA redundancy costs are met by the DTI along with some other payments).
Disadvantages of a CVA
The business will be required to adhere to the terms of the agreement. A failure, at any stage could result in liquidation. Therefore the business could make payments for several years only to find that the business is placed into liquidation.
Requires significant support from interested parties. Suppliers are usually required for the ongoing business and there is a risk that those in a strong negotiating position will take advantage of the position.
The shareholders of the business will derive no benefit of their investment for the duration of the agreement. This may be of particular concern for owner managers.
A large proportion of CVAs fail. This is usually because the underlying problems of the business were not resolved prior to the CVA.
