When a struggling business appears to be viable with the prospect of becoming profitable again, and the directors are willing to continue, a company voluntary arrangement (CVA) may be an ideal way to protect against legal actions taken by creditors. The terms of a cva are likely to provide lower monthly outgoings and would produce a binding contract for all creditors (the CVA proposal).
The terms of a cva proposal will specify the percentage of the debt that the creditors will be paid back during the period of the company voluntary arrangement.
Is Your Company Eligible or Suitable for a CVA?
Before getting too excited about the benefits of using a CVA to facilitate a turnaround it is important to verify that your company is indeed eligible and/or suitable for the procedure. Here are some key points to consider:
- The company must be insolvent or contingently insolvent (considered insolvent after contingent liabilities are factored in).
- The directors and the insolvency practitioner must be confident that the business has a viable future and a realistic prospect of recovery.
- The business should have projected cash flow forecasts that indicate there will be enough capital to cover the agreed upon repayment amounts.
It is helpful if the company already has good financial accounting and reporting systems in place, as this documentation will help to streamline the process.
The Main Benefits of a Company Voluntary Arrangement (CVA)
Aside from the obvious advantages of a CVA, consider the following main benefits:
- Halts pressure from creditors and HMRC while the arrangement is being prepared.
- Protects your company from any legal actions taken by creditors while the CVA is active, as long as you adhere to the terms of the arrangement.
- Centralises all of your creditors into a single monthly payment.
- Company directors and shareholders stay in control of the business throughout the procedure and there is no need to make the public specifically aware by advertising in the London Gazette that you're in a Company voluntary arrangement, as would be the case with company administration.
- Can stop a winding up petition from putting your company out of business. Keep in mind that the CVA will usually have to be proposed within 7 days of being served a winding up petition for this to be successful.
- Improves cash flow.
- Facilitates a mutually beneficial deal that works in the best interest of your creditors, as they get to have at least some (between 20%–100%) of the debt owed to them repaid in a reliable manner.
The Steps Involved in the CVA Process
The following is a rough outline of the events that lead up to a successful CVA:
- The Initial Assessment - To begin the CVA process you would need to contact an insolvency practitioner. The IP will determine whether a CVA is the best course of action for your company and its creditors.
- Appointing an IP to Draft the CVA - If a company voluntary arrangement is recommended and you would like to proceed then you would appoint the IP to draft a CVA proposal for your creditors.
- Directors consider the CVA draft proposal - After the IP has drafted a CVA proposal it will be examined by your company's directors and revisions will be made if needed. If director's do not feel that their company will be able to adhere to the terms of the CVA and a realistic draft cannot be devised then the IP may recommend a creditors' voluntary liquidation instead. The insolvency practitioner must be confident that the CVA has a realistic prospect of success in order to act as the nominee.
- The CVA is Filed with the Court - The final draft of the CVA is filed at the Court, given a legal originating number, and then signed copies of the proposal are sent to all creditors. The CVA must be sent at least 3 weeks before the creditors' meeting is held.
- Creditors' and Shareholders' Meetings are Held - The appointed IP convenes a meeting of all of the company's unsecured creditors. It is not uncommon for the creditors themselves to be absent at this meeting, as they may send a representative to act on their behalf or merely post or fax their proxy forms to accept or reject the CVA proposal. During the meeting the CVA will be proposed to creditors by the IP and creditors (or their representatives) are given the opportunity to question or request revisions or amendments to the proposal. At the same time a meeting of the company's shareholders will take place.
- Creditors and Shareholders Vote On Whether to Approve the Proposal - During the creditors' meeting a vote will be held and if an amount of creditors responsible for 75% or more of the company's unsecured debt vote in favour of the CVA then it is approved. If modifications to the proposal are requested then the same rule of 75% majority approval applies. This is the part of the process that most directors are worried about. However, if care is taken to draft a thorough and detailed CVA, and to communicate with creditors leading up to the meeting, then there should be no problem in obtaining approval in most cases. Regarding the shareholders' meeting – at least 50% of shareholders must vote in favour of the proposal for it to be approved.
- Meeting Chairman Issues Report - if both of the meetings result in the approval of the proposal then the chairman (the appointed IP) will need to issue a report to all of the company's creditors and the Court, within 4 days of the meeting. This report will provide an overview of what happened during the meeting, who was present, and how each party voted.
- Any Legal Actions Against Your Company are Stayed – Once the CVA is approved any legal actions being taken against your company are frozen and no further actions can be taken unless the CVA is defaulted on.
- Regular Contributions are Made to a Trust Account – Finally, once the CVA is in effect your company will be expected to make the projected contributions to a trust account. As long as these contributions are met then the business will continue operating without the threat of being put out of business. If, however, contributions are not met then the likely result will be compulsory liquidation. Bear in mind that if the company breaches the terms of its' Company Voluntary Arrangement the supervisor of the arrangement will almost certainly have to petition to wind the company up by means of a compulsory liquidation.
What Does a CVA Proposal Contain?
The contents of the Company voluntary arrangement proposal are required by law to meet the guidelines of The Insolvency Rules 1986 – Rule 1.3. A typical CVA will contain basic information about the insolvent business and the appointed nominee/IP (i.e. - names, addresses, and contact details). There will be an in-depth introduction to the company's affairs, including information about employees, profits, and significant transactions or events.
The IP you appoint as nominee will work with your company's directors to make this section as accurate and detailed as possible. After the introduction will be the main proposals, followed by information about the company's creditors and debts. Keep in mind that you will need to be prepared to provide documentation and facts about your company during the drafting of the CVA.
How Long Does a CVA Proposal Take to Complete?
Usually about 1 month will pass between when you appoint the IP to produce the CVA and when it is posted to creditors. After that, about 3 weeks later the creditors' meeting should be held. So altogether the process tends to take about 6-8 weeks to complete on average. However, keep in mind that after this you'll be required to make regular contributions to the designated trust account for up to 5 years (depending on the length of the CVA).
When Can a CVA Be Proposed?
A Company Voluntary Arrangement can be proposed at any time up until a winding up order is granted against your company. If you have already been served a winding up petition, or your creditors are threatening to issue one then you still have time to set up a CVA and save your business if you act quickly! Once the winding up order is granted compulsory liquidation will commence and at this point the possibility of facilitating a recovery through any means is unlikely.
If your company enters into administration, the administrator may propose a CVA during the course of the procedure as a way to bring about a turnaround. Likewise, a liquidator may propose a CVA if it is thought that the arrangement would be more beneficial to creditors than to liquidate the company's assets. Likewise a company in a CVA can also enter into liquidation.
How Much Does a CVA Cost to Propose?
The main expense you'll have to cover when setting up the arrangement is the cost of instructing an insolvency practitioner to formulate and present the CVA proposal on your behalf. This is known as the nominees fee and will vary depending on the amount of work involved, the particulars of your case, and the insolvency firm you choose to deal with. However, on average the nominee fees will be between £5000 and £10000 and the cost of supervising the arrangement will be decided by the creditors. As these fees come out of the money paid to the creditors it is the creditors who agree the fees of the insolvency practitioners.
Here at Real Business Rescue we offer highly competitive rates, and we've helped countless businesses avoid liquidation and dissolution through CVAs. Contact us for a free consultation and we can give you a more accurate assessment of how much the procedure will cost your company.
CVA's can be particularly effective solutions for companies that need to retain certain certifications or contracts which cannot be transferred to another company. It must be remembered that there are some down sides to CVA's, a CVA will affect a company's credit score and sometimes companies will find it difficult to receive their normal supplies.
At Real Business Rescue our insolvency practitioners have extensive experience constructing CVAs that have a very high rate of approval and long-term success. For a free consultation send us an email or call us on 0800 644 6080.
Still have questions about Company voluntary arrangements? View our CVA - FAQs for more answers.