A company voluntary arrangement or CVA is a rescue insolvency procedure that enables a viable business to restructure and continue trading whilst still being able to pay back some of the debts owed to creditors over an agreed period. It is also a way to reduce overheads and give the business a chance to recover without the threat of the more drastic insolvency procedures such as administration or liquidation.
It is a formal agreement that is legally binding and will allow company voluntary arrangement or CVA a proportion of the debts to be paid over an agreed period of time. It is an alternative to liquidation or administration and allows the directors of the business to preserve their own positions and save jobs by agreeing to a repayment schedule with creditors that will allow them to pay back what they are owed over an extended period of time, and in the process write off some of the debts owed to them.
CVAs can be complicated and are not suited to every situation, however it is a powerful tool for many businesses and it may provide the best opportunity for the survival of your business. It is important to note that a CVA only works if the directors are confident that they are able to recover their business to profit and repay their creditors at a reasonable rate. If not, then the company will likely fail and other options like a Creditors Voluntary Liquidation (CVL) are more likely to succeed.
In order for a CVA to be approved the proposal needs to be supported by 75% of the creditors, by value, who vote on it. Once the proposal has been voted on and approved an insolvency practitioner will be appointed as the Supervisor of the CVA to ensure that the terms are adhered to by both the company and the creditors.
Creditors are not permitted to take any further action against the company and the debts will be ‘frozen’ in the CVA. However, the company will need to make agreed payments into a trust account that is administered by the Supervisor which is used to pay towards the debts and the costs of the CVA.
If the company fails to make any payments into the trust account or if it breaches any of the other terms of the CVA then the supervisor can terminate the agreement and this could result in the company being put into liquidation. Therefore, the company should always seek professional advice before proposing a CVA.
A CVA will have an impact on the company’s credit rating and it may be more difficult to obtain credit from suppliers or renegotiate terms with customers. However, this can be overcome through careful preparation and negotiation.