Companies may face periods of financial distress due to various reasons such as market fluctuations, economic downturns, or unexpected events. In such situations, it’s crucial to have mechanisms that can help businesses navigate through these tough times and work towards a solution that benefits all parties involved. One such mechanism is the Company Voluntary Arrangement (CVA). This article answers the question “what are CVAs?”
A CVA is a tool that allows companies facing financial difficulties to agree on a repayment plan with their creditors, providing a lifeline to businesses that are viable but currently burdened with debt. This arrangement can offer a win-win solution, enabling the company to continue trading while ensuring creditors receive a proportion of what they are owed.
At Company Doctor, we understand the complexities businesses face when dealing with financial distress. As licensed insolvency practitioners based in Leeds, we specialise in providing advice and solutions to directors of insolvent companies. If you’re struggling with insolvency issues and need professional advice, don’t hesitate to give us a call at 0800 169 1536 or leave an enquiry on our website. We’re here to help.
In the following sections, we will delve deeper into the concept of CVAs, discussing what they are, how they work, and their pros and cons. We’ll also answer some frequently asked questions about CVAs to provide a comprehensive understanding of this important insolvency solution.
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What are CVAs?
A Company Voluntary Arrangement (CVA) is a formal agreement between a company and its creditors, designed to resolve issues of debt and insolvency. It is a legal process under the Insolvency Act 1986 of England and Wales, and it allows a company in financial distress to pay off its debts over a fixed period.
In essence, a CVA is a proposal put forward by the directors of the company, outlining how they plan to repay the company’s debts, either in part or in full, over a specified period. This proposal is prepared with the assistance of a licensed insolvency practitioner, who acts as the ‘nominee’. The nominee helps to draft the proposal, provides advice, and liaises with creditors.
The purpose of a CVA is to allow a financially troubled company to avoid liquidation or administration, giving it a chance to recover and return to profitability. It provides a structured framework for the company to repay its debts in a manageable way, while continuing to trade and generate revenue. This is beneficial not only for the company but also for the creditors, as they are likely to receive a higher return through a CVA than they would in the event of liquidation.
CVAs are particularly useful for businesses that are fundamentally sound but are experiencing cash flow problems or have accumulated debt over time. By agreeing to a CVA, creditors show their support for the company’s recovery plan, providing the company with the breathing space it needs to get back on its feet.
In the next section, we will delve into the process of a CVA, providing a step-by-step guide on how it works.
The CVA Process
The process of implementing a Company Voluntary Arrangement (CVA) involves several key steps, each playing a crucial role in ensuring the success of the arrangement. Here’s a detailed look at the CVA process:
- Identifying Financial Difficulties: The first step in the CVA process is the recognition by the company that it is facing financial difficulties that it cannot overcome without assistance. This could be due to mounting debts, cash flow problems, or other financial issues that are hindering the company’s operations.
- Contacting a Licensed Insolvency Practitioner: Once the company acknowledges its financial problems, it should contact a licensed insolvency practitioner. This professional will assess the company’s financial situation, provide advice, and help determine whether a CVA is the most suitable option.
- Drafting the CVA Proposal: If a CVA is deemed appropriate, the insolvency practitioner, acting as the ‘nominee’, will work with the company’s directors to draft a proposal. This proposal will detail how the company plans to repay its debts, including the amount to be repaid, the duration of the repayment period, and how the repayments will be funded.
- Sending the Proposal to Creditors: The CVA proposal is then sent to all the company’s creditors. They are given a full explanation of the company’s situation and the proposed repayment plan. The proposal will also include a report from the nominee, outlining their opinion on whether the proposal is fair and feasible.
- Creditors’ Meeting: A meeting of the company’s creditors is then held, either physically or virtually. At this meeting, the creditors vote on whether to accept the proposal. For the CVA to be approved, at least 75% (by debt value) of the creditors who vote must agree to the proposal.
- Implementing the CVA: If the CVA is approved, the insolvency practitioner will oversee its implementation, ensuring that the company adheres to the agreed repayment plan. The company can continue to trade during this period, working towards its recovery.
- Alternative Options: If the CVA is not approved by the creditors, the company may have to consider other insolvency options, such as liquidation or administration.
A flowchart of this process is below:
The role of the insolvency practitioner is pivotal throughout this process. They not only assist in drafting the CVA proposal but also act as the mediator between the company and its creditors, ensuring that the process is carried out fairly and transparently.
In the next section, we will discuss the advantages and disadvantages of CVAs, providing a balanced view of this solution.
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Pros and Cons of CVAs
Company Voluntary Arrangements (CVAs) can be a lifeline for struggling businesses, offering a structured and legally binding path to financial recovery. However, like any insolvency tool, they come with their own set of advantages and disadvantages. Let’s explore these in detail:
Benefits of CVAs
- Continued Trading: One of the main advantages of a CVA is that it allows the company to continue trading while repaying its debts. This means that the company can work towards recovery without the threat of immediate closure.
- Control Remains with the Directors: Unlike other insolvency procedures such as administration, in a CVA, the control of the company remains with the directors. This allows those with intimate knowledge of the business to guide it through the recovery process.
- Protection from Legal Actions: Once a CVA is approved, the company is protected from legal actions by its creditors. This means that creditors cannot take further action to recover their debts outside of the agreed CVA terms.
- Potential for Rent Reductions: For businesses with significant property leases, a CVA can provide an opportunity to renegotiate and potentially reduce rental costs.
- Improved Cash Flow: By consolidating debts into a single, manageable monthly payment, a CVA can significantly improve a company’s cash flow.
- Creditor Support: A CVA requires the support of 75% of creditors (by debt value), which means that the majority of creditors are on board with the proposal. This can lead to improved relationships with creditors.
Disadvantages of CVAs
- Potential Damage to Reputation: Entering into a CVA can damage a company’s reputation. Suppliers, customers, and potential investors may see it as a sign of financial instability.
- Risk of Failure: If the company fails to meet the terms of the CVA, it could be forced into compulsory liquidation. This is a significant risk, particularly for companies with unstable cash flows.
- Limited Impact on Secured Debts: CVAs primarily deal with unsecured debts. Secured creditors, such as mortgage lenders, are often unaffected by a CVA and can still take action to recover their debts.
- Potential for Unfair Prejudice: Some creditors may feel that they are unfairly disadvantaged by a CVA, particularly if they are owed a significant amount but do not hold a majority of the debt.
- Long-Term Impact: A CVA can last for several years, during which time the company must adhere to the agreed repayment plan. This can limit the company’s ability to invest and grow during this period.
In the next section, we will provide a quick guide to CVAs, summarising the key points discussed so far.
Legislation Relevant to CVAs in England & Wales
Company Voluntary Arrangements (CVAs) are governed by Part I of the Insolvency Act 1986, which provides the legal framework for CVAs in England and Wales. This legislation outlines the process for proposing and approving a CVA, as well as the rights and responsibilities of the company and its creditors.
Key Legal Terms
Understanding the legal terminology associated with CVAs is crucial for both companies considering a CVA and their creditors. Here are explanations of two key terms:
- Unfair Prejudice: This term refers to a situation where a creditor, or a group of creditors, is unfairly disadvantaged by the terms of a CVA. For example, if a CVA proposal treats one creditor less favourably than others without a valid reason, that creditor may claim unfair prejudice. If a court agrees that the CVA is unfairly prejudicial, it can revoke or amend the CVA.
- Material Irregularity: A material irregularity refers to a significant error or issue in the CVA process. This could include a mistake in the CVA proposal, a failure to properly notify creditors of the creditors’ meeting, or a significant error in the conduct of the meeting itself. If a creditor can demonstrate that a material irregularity has occurred, they may be able to challenge the CVA in court.
It’s important to note that CVAs are complex legal processes, and companies considering a CVA should always seek professional advice. At Company Doctor, we are licensed insolvency practitioners based in Leeds, offering advice and solutions to struggling directors with insolvent companies. Contact us at 0800 169 1536 or leave an enquiry on our website.
FAQs about CVAs
In this section, we will answer some of the most frequently asked questions about Company Voluntary Arrangements (CVAs).
What is a CVA?
A Company Voluntary Arrangement (CVA) is a legally binding agreement between a company and its creditors, allowing the company to repay its debts over a fixed period. It’s a tool used by companies facing financial difficulties to avoid insolvency and continue trading.
Who can propose a CVA?
A CVA can be proposed by the directors of a company, the company’s administrators, or a liquidator if the company is in liquidation.
What role does an insolvency practitioner play in a CVA?
An insolvency practitioner acts as the nominee and supervisor in a CVA. They help the company prepare the CVA proposal, present it to creditors, and oversee the implementation of the CVA if it is approved.
How is a CVA approved?
A CVA is approved if 75% or more (by debt value) of the company’s creditors who vote at the creditors’ meeting agree to the proposal.
Can a CVA be challenged?
Yes, a creditor can challenge a CVA on the grounds of unfair prejudice or material irregularity within 28 days of the creditors’ meeting.
What happens if a company fails to meet the terms of a CVA?
If a company fails to meet the terms of a CVA, the arrangement may fail, and the company could be put into liquidation.
Remember, if you’re considering a CVA for your company, it’s important to seek professional advice. At Company Doctor, we’re here to help. Contact us at 0800 169 1536 or leave an enquiry on our website.
Conclusion
A Company Voluntary Arrangement (CVA) is a powerful tool that can provide a lifeline for companies facing financial difficulties. It allows a company to come to a legally binding agreement with its creditors to repay its debts over a fixed period, thus avoiding insolvency and allowing the company to continue trading.
However, CVAs are complex legal processes that require careful planning and execution. They involve key stages such as the preparation of a CVA proposal, a creditors’ meeting, and the ongoing management of the CVA. It’s also important to be aware of potential challenges, such as claims of unfair prejudice or material irregularity.
While CVAs offer many benefits, including flexibility and control for the company and a better return for creditors than liquidation, they also come with potential disadvantages. These include the risk of failure if the company cannot meet the terms of the CVA, potential damage to the company’s reputation, and the need for full disclosure of the company’s affairs.
It’s crucial to seek professional advice. At Company Doctor, we are licensed insolvency practitioners based in Leeds, offering advice and solutions to struggling directors with insolvent companies. Contact us at 0800 169 1536 or leave an enquiry on our website. We’re here to help you navigate the challenges and make the best decisions for your company’s future.
References
The primary sources for this article are listed below.
Company Voluntary Arrangement – Insolvency Service – GOV.UK (www.gov.uk)
Insolvency Act 1986 (legislation.gov.uk)
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