Is a CVA right for my company?

What is a CVA?

If your company is struggling with unmanageable debt but could go on to be profitable again, a Company Voluntary Arrangement (CVA) may be a good option.

A CVA is a formal insolvency procedure that allows your company to restructure its unsecured debts and continue trading. You will need the help of a licensed Insolvency Practitioner to put the CVA in place. They will work with you to create an affordable repayment proposal for your creditors. If 75% of your creditors (by value of debt) agree to the proposal, the CVA becomes legally binding. 

You then make a monthly payment to the Insolvency Practitioner, who distributes it among your creditors on a proportional basis. If you make all the monthly payments, any outstanding debt not covered by the repayment arrangement will be written off at the end of the CVA.

Is a CVA suitable for my company?

Whether a CVA is right for your company depends on a few factors:

• Is your company insolvent?

Your company must be insolvent to propose a CVA. A business is insolvent when: 

- It cannot pay its debts when they’re due; and/or 
- The value of its liabilities is greater than its assets; and/or 
- A creditor may have taken legal action to recover an unpaid debt you cannot pay. 

If you’re unsure whether your company is insolvent, you can contact our Insolvency Practitioners for a free financial assessment of your business.  

• Is the business viable?

A CVA is only suitable if the company directors and an Insolvency Practitioner believe the business is financially viable and can go on to be profitable. It’ll need a reliable income stream, a viable business model and a clear plan for the future. 

• Is the CVA affordable?  

The monthly CVA payments you propose must be affordable but also attractive enough to be accepted by your creditors. You must produce cash flow forecasts to show you can afford the repayments and meet the ongoing liabilities you incur while continuing to trade. 

If your answer to all three of these questions is yes, there’s a good chance a Company Voluntary Arrangement could be suitable for your business. If you decide to go ahead with a CVA, as a company director, you must be fully committed to the process. Following the repayment plan for an extended period requires real discipline. You must also be honest and transparent about your finances.

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Can I write off debt with a CVA?

One benefit of a CVA is the ability to write off a proportion of your unsecured debt as part of the process. You will work with an Insolvency Practitioner to establish an affordable monthly payment. You’ll make that payment for a fixed duration, usually five years, and any unsecured debt not repaid at the end of the period will be written off.

You might wonder why your creditors would vote for a CVA when they are unlikely to receive all the money they’re owed. However, in most cases, they’ll receive a better return from a CVA than the alternatives, such as Company Liquidation. Your company might also be an important customer for a creditor, and keeping it in business will help to protect a valuable income stream.   

What are the pros and cons of a CVA?

There are significant advantages to tackling company debt with a CVA. There are also some disadvantages to be aware of before entering the process. 

The advantages of a Company Voluntary Arrangement 

• You continue trading - A CVA enables you to repay historic debts from future cash flows. By continuing trading, you protect jobs, preserve the brand and ensure continuity of service for your customers.
• You retain control - Unlike other formal insolvency procedures such as Company Administration, the company directors retain control of the business. You continue to make the key decisions and manage its day-to-day affairs.
• There’s legal protection - Once a Company Voluntary Arrangement is in place, the unsecured creditors included in the agreement cannot take legal action against your company as long as you continue to make the payments.
• The debts are frozen - Any debts included in the CVA are usually frozen, so your creditors cannot add interest or apply extra charges.
• There are no director investigations - Unlike Administration or Liquidation, your conduct as a company director is not investigated as part of the CVA procedure. There’s also no requirement to repay an overdrawn director’s loan account.
• You can restructure your liabilities - As part of the CVA process, you can terminate or renegotiate commercial leases you cannot afford.
• Your debts are reduced - The monthly repayments are calculated according to what you can reasonably afford. Creditors expect to receive a significant amount of the money they’re owed, but unaffordable debt can be written off. 

The disadvantages of a CVA

• Your creditors must agree - Creditors owed 75% of your unsecured debt must agree to the CVA. You’ll need to create a strong proposal and convince your creditors that they’ll receive more than they would from an alternative procedure such as Liquidation.
• It can be a cost burden - Sticking to the terms of a CVA for three to five years requires commitment and paying this outgoing alongside your ongoing costs can put a financial strain on the business. 
• The company’s credit rating will be affected - Having a CVA on the company’s credit record will make it more difficult to secure credit from suppliers and finance providers. You may have to pay suppliers upfront and provide personal guarantees for company borrowing.  

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What are the alternatives to a CVA?

If a CVA is not right for your company - perhaps your creditors won’t accept your proposal or the debt amount is too large - there are other options you can explore:

HMRC Time to Pay Arrangement

If a significant proportion of your company’s debt is unpaid tax, an HMRC Time to Pay Arrangement allows you to pay what you owe in instalments over around six months. You can get up to 12 months in certain circumstances.  

Company Administration

Administration may be a better option if the company has a lot of debt or is under extreme pressure from its creditors. The company will be restructured with the aim that it can continue to trade.  

Pre-Pack Administration

Pre-Pack Administration may be a good option if the business has valuable assets and could be profitable under the ownership of a connected or unconnected buyer. 

Voluntary Liquidation

If the company is not viable and cannot be saved, a Creditors’ Voluntary Liquidation (CVL) enables you to close it in an orderly manner so you can start afresh. It also avoids the negative consequences associated with Compulsory Liquidation.  

Is a CVA right for me?

If you are worried about the financial position of your business but believe it could go on to be profitable if given more time, a CVA could be an option. At Real Business Rescue, we will assess your company’s finances and explore all the options available to your company. If a CVA is suitable, we will help you draft affordable proposals and provide the practical guidance you need. Get in touch for a free consultation or arrange a meeting at one of our 100+ UK offices.