Published on 2 November 2010  by Tony Groom

A CVA (Company Voluntary Arrangement) is a powerful tool for restructuring the liabilities of an insolvent company, but it does not, in itself, save the company unless the business is viable.

A CVA is an agreement between an insolvent company and its creditors. Therefore a thorough business review is also needed to support the CVA by establishing that the business can be profitable in the future.

The arrangement is a legal agreement that protects a company – essentially giving it some time or a breathing space by preventing creditors from attacking it.

It allows a viable but struggling company to repay some, or all, of its historic debts out of future profits, over a period of time to be agreed, and allows the company’s  directors to stay in control of the company.

CVAs allow a company to improve cash flow quickly, by removing pressure from tax, VAT and PAYE authorities and other creditors while the CVA is prepared. They can also be used to terminate employment contracts, leases, onerous supply contracts with no immediate cash cost.  It is a relatively inexpensive process.

A company can be protected from an aggressive creditor while a CVA is being proposed and constructed. It can stop legal actions like winding up petitions. In case law, providing a creditor has less than 25% of the overall debts of the company then they can be required to consider the proposal even when a winding up petition is issued.

Ultimately it is also a good arrangement for creditors as they retain a customer and receive a dividend on their debts, which might otherwise be written off in the event of liquidation.

However, it is not a do-it-yourself option for a struggling business but should only be entered into with the help and guidance of an experienced business rescue adviser with the tools and knowledge to help turn around struggling companies.

The business rescue adviser will review the business thoroughly to establish that it is viable.  That means examining the accounts and business plan, identifying any underlying weaknesses and thoroughly understanding the company’s activity, offer, culture and market.

Once it has been established that the company can be turned around, given time, the rescue adviser will produce a turnaround plan and draft the CVA to deal with the creditors.

There is no legal minimum payment or dividend. The law simply lays out a method for offering a deal to the company’s creditors. This is known as a CVA. The amount the company pays back to the creditors under the CVA should always be based upon affordability not some arbitrary number. It is often a programme of payments over a period of years, but it could be a lump sum payment upfront or other proposal acceptable to the creditors.

For example, one recent example, a property company agreed a CVA with creditors on the basis that no payment would be made until property was sold. But in order to realise value, planning permission for a change of use to a residential scheme was required to increase the value of the property. Once sold, this was expected to pay creditors 70p in the £1, whereas otherwise they would have received nothing.

The company’s bank is normally a secured creditor whose rights are not affected by a CVA.  They normally do not appoint an administrator under their rights as a qualifying floating charge holder where the CVA proposal is realistic and the emerging business is viable. However, normally the local bank manager will pass on the relationship to a special management unit.

HM Revenue & Customs (HMRC) have a specialist team that deals with CVA proposals. They generally support a well-considered CVA proposal although they have a large number of standard modifications that an experienced rescue adviser will have covered when drafting the proposal. CVAs offer the opportunity of having a much longer repayment period than could be agreed under their TTP (Time to Pay) scheme. Furthermore a CVA can allow for paying less than 100% of the debt due to HMRC whereas a TTP arrangement requires 100% to be repaid.

Far too often companies that are struggling with liquidity in the short term, as many currently are because of the global economic downturn, find themselves facing winding up petitions in the high court, often from the HMRC following many communications over unpaid tax that have been ignored.

Without proper advice and guidance companies that are actually viable on closer examination despite their current problems find themselves forced into insolvency when they could actually be saved with the help of a CVA.