Published on 24 November 2011 by Tony Groom
A Company Voluntary Arrangement (CVA) is a binding agreement between a company and those to whom it owes money (creditors).
A CVA is based on a proposal that will include repayment terms. These should be affordable, realistic and manageable. While the proposed payment period can be much shorter, it normally allows for repayment to be spread over a period of three to five years. It can also be used to offer to repay less than the amount due ie less than 100% of the debt if this is all the company can afford.
The proposal is sent to the Company’s Creditors along with an independent report on the proposal by an insolvency practitioner acting as Nominee.
Creditors are invited to respond to the CVA proposal by voting to either accept it, or reject it, or accept it subject to modifications that the Creditor proposes as a condition of their vote for acceptance. The votes are counted by value of claim where the requisite majority for approval is 75% of the votes cast. This is subject to a second vote to check that 50% of the non-connected creditors approve the proposals.
A CVA can be used to allow a company in difficulty to reschedule its debts in such a way that allows it to continue to trade where without the CVA it would have to cease to trade.
In that sense it can be used to save a company rather close it when creditors are pressing including when a debt related judgement can’t be satisfied or a creditor has filed a Winding Up Petition (WUP).
It CVA can only be used when a company is insolvent, which can be assessed using the four tests contained in the Insolvency Act 1986. The usual test involves the company having cash flow problems.
The proposal must demonstrate to creditors that the surviving business is viable ie it is profitable with positive cash flow or adequate funds to finance trading. This may involve substantial reorganisation where the cost of terminating contracts such as leases and employment may be included among the creditors.
In addition to proposing terms for repaying debt, it helps to include details of any restructuring and reorganisation along with a business plan so that creditors can assess the viability of the surviving business. The proposals must be fair and not prejudice any individual or class of creditor including those with specific rights such as personal guarantees. These include trade suppliers, credit insurers, finance providers, employees. landlords and HM Revenue and Customs, the latter often being key in view of the arrears of VAT and PAYE that many companies have built up.
A CVA is proposed to creditors by the company’s directors.
An adviser, usually an insolvency practitioner or business rescue adviser will be needed to assist the directors to draft the CVA proposals and deal with creditors, whose views are often sought during the drafting process.
The advisers normally also send out the proposal and organise a creditors’ meeting as it must comply with specific requirements such as filing in court and giving at least 14 days notice to creditors of the meeting.
Embarking on a CVA should only be used when the company’s directors are willing to be honest with themselves and face up to the position the company is in, preferably with the advice and guidance of an insolvency practitioner or experienced business rescue advisor.
This is because the company’s financial state and its viability should first be assessed by someone with turnaround experience who can challenge the directors and their assumptions about what needs to be done. They will also need to be able to develop and implement plans to reorganise and restructure the business in such a way that it becomes both profitable and cash flow positive.
Used properly a CVA can improve a company’s cash flow very quickly by removing onerous financial obligations and easing the pressure from creditors.