What is the process for a Company Voluntary Arrangement (CVA)?
A Company Voluntary Arrangement – or CVA – is a formal insolvency process which functions as a legally-binding payment plan entered into by an indebted company and its creditors. CVAs typically last between 3-5 years, during which time the company will make a series of monthly repayments which will then be distributed amongst creditors on a proportional basis.
A Company Voluntary Arrangement - often known as a CVA - is a legally-binding insolvency process which essentially functions as a formal payment plan between an indebted company and its outstanding creditors. A CVA allows for unmanageable company debts to be paid back over an agreed period of time, typically 3-5 years, at a rate which is affordable to the company and agreeable to the creditors. Depending on how much the company can afford to repay, some debt may be wiped out completely.
While a CVA may look to be an appealing process, not all companies will qualify for one. This is because at least 75% (by value) of voting creditors must agree to the CVA being implemented before it is made legally-binding. A creditor is only likely to give their consent to such a process if they are confident that the company will be able to maintain the payments for the duration of the CVA period.
A CVA can only be entered into under the guidance of a licensed insolvency practitioner who will act as the nominee and supervisor for the process. They will begin by formulating a payment proposal based on the company's ability to repay, and present this to creditors who will vote on whether or not they agree to the terms on offer.
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There are many more advantages to a CVA process than disadvantages when a company is in trouble, which is why so many companies look to negotiate their outstanding liabilities under the Company Voluntary Arrangement framework. Here are what most insolvency professionals consider to be the main advantages to a CVA:
Continue Trading - A huge advantage of a CVA process is that it allows for trade to continue uninterrupted for the duration of the CVA. There will be no investigation into the conduct of the directors as there would be in a liquidation process, and the company is free to go on about its daily business whilst restructuring and trading
Directors Retain Control - Unlike most alternative insolvency procedures, with a CVA, the company's directors remain in control of the company and its affairs at all times. This is hugely advantageous, particularly in specialised industries because no one knows that business better than the directors and/or owner
Legally Binding Repayments - After juggling various creditors, many directors enjoy the certainty that a CVA brings when it comes to knowing exactly where they stand and how much they have to pay creditors every month. As CVAs typically last between 3-5 years, CVAs have the advantage of allowing directors to plan for the medium and long-term much better and with more accuracy
Reduction of Outstanding Liabilities - A major advantage of a CVA is that as part of the process, any debt which is unaffordable will be written off. Simply put, creditors would rather get some of the money they are owed back rather than risk receiving nothing if the company's problems continue to grow. While creditors will expect to recover a significant amount of what you owe them, writing off the rest of the debt is often part of the deal they agree to
Ability to Restructure, inc Terminating Leases - As part of the CVA process, a company is able to restructure and streamline its operations. CVAs are particularly popular in the retail industry due to this particular advantage. A retail chain, for example, can terminate or renegotiate onerous commercial leases with landlords in order to lessen the current and ongoing outgoings of the company
What are the disadvantages of a CVA?
Under the right circumstances, CVAs are an extremely beneficial process, however, there are some disadvantages which should also be considered alongside the main advantages. The key disadvantages include:
Creditor Agreement - One of the main disadvantages of a CVA is that creditor approval is required. In order for a CVA to become legally-binding on all parties, a company must first receive approval from at least 75% (by value) of voting creditors. This is where a strong and robust CVA proposal can make all the difference in convincing creditors that a CVA is the best option for all concerned
Time Sensitive Process - CVAs have a greater chance of approval and ultimate success if a proposal is made to creditors at an early stage of insolvency. If directors wait too long to propose a CVA, the viability of such an arrangement can lessen significantly. The sooner a CVA can be implemented, the better
Keeping up with Repayments - A disadvantage of a CVA is that it requires commitment from the directors for several years following implementation. Before entering into a CVA, you must be prepared to keep up with your agreed repayments to creditors for the duration of the arrangement which is typically 3-5 years. Failure to do this could lead to the liquidation of your company
Is Your Company Eligible or Suitable for a CVA?
While there are many benefits of using a CVA process to facilitate a turnaround, it is important to first verify that your company is indeed eligible and/or suitable for the procedure. Here are some key points to consider:
The directors and the appointed 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.
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When a company is in difficulty, sometimes a process of financial and/or operational restructuring is needed. From CVAs through to Administration, there are a range of rescue and recovery options to help you get back on track. Learn more about restructuring by calling our team - 0800 644 6080
Is a CVA the same as liquidation?
A CVA is very different to a liquidation process. While they are both formal insolvency processes, they are very different in what they set out to achieve.
A Creditors’ Voluntary Liquidation (CVL) is a terminal process which closes down an insolvent business which is beyond the point of rescue. A Company Voluntary Arrangement, on the other hand, gives a financially challenged, yet ultimately viable company, a chance to trade its way out of its current problems.
If you want to save your financially challenged company and allow trade to continue, a rescue process such as a CVA could allow you to do that.
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Employees can be adversely affected by a CVA given that its purpose is to reduce costs. Payroll liabilities can be significant for a business, which increases the risk of redundancy for staff of an ailing company.
However, it should be remembered that the purpose of a CVA is to allow the company to continue to trade which means there is a clear need for staff who are familiar with the business. The restructuring that takes place within a CVA offers the opportunity for the company to streamline and save jobs that potentially would have been lost through liquidation.
If staff redundancies are unavoidable, eligible employees can claim redundancy pay and other statutory entitlements through the Redundancy Payments Service (RPS), however. They receive their payments quickly, and the government then becomes a creditor within the CVA.
The Process and Timeline of a CVA
The following is a rough outline of the process which leads to a successful CVA:
The Initial Assessment - To begin the CVA process you would need to contact an insolvency practitioner. The insolvency practitioner 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 insolvency practitioner to draft a CVA proposal for your creditors.
Directors consider the CVA draft proposal - After the insolvency practitioner 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 insolvency practitioner 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 insolvency practitioner 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.
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What is the role of HMRC in a CVA?
For the vast majority of companies struggling with mounting financial pressure, money owed to HMRC for tax arrears is likely to form part of the problem. When it comes to the CVA process, HMRC are classed as a preferential creditor; as such, they will be given the opportunity to vote at the creditors meeting which determines whether the CVA is approved. Remember that a CVA can only be entered into with the agreement of at least 75% (by value) of your creditors – including HMRC.
While HMRC may only be one of a number of creditors your company has, it may well be the case that you owe them a disproportionally large amount of money meaning that HMRC can, in some cases, essentially have the deciding vote on whether or not the CVA is approved.
Although this may be a daunting prospect, HMRC are more accommodating than you may think. The thing working in your favour is that not only do the government want to get paid the tax they are owed, but they also recognise the value of keeping UK businesses afloat for the greater good of the wider economy.
When you consider that the likely alternative to a CVA is the company going into liquidation, as long as you can present a convincing argument for the CVA which shows your company’s ongoing viability, HMRC are likely to be open to accepting the proposal.
What is the role of shareholders in a CVA?
Should creditor approval be given for the CVA, the proposal will then be put in front of shareholders who will be asked to vote on it. A CVA requires the approval of more than 50% of shareholders in order to be passed.
In a company with two shareholders both must therefore agree to the CVA. For companies with a larger number of shareholders, however, this rule means that a CVA can be passed without the support of all shareholders, so long as the majority are in agreement that doing so is in the best interests of the company and its creditors.
If fewer than 50% of shareholders give their support to the proposed CVA then it will be rejected and neither party will be held to its terms. Shareholders will then have to find another way of dealing with the outstanding debts of the company. This may involve an alternative insolvency procedure such as placing the company into administration, or else coming to a more informal arrangement with creditors.
On the other hand, shareholders may vote to reject the CVA if they do not believe the company has a viable future, or if they are not interested in saving the business. In this instance, the company may then choose to enter a formal liquidation procedure such as a Creditors’ Voluntary Liquidation (CVL) which would bring about the end of the company.
What Does a CVA Proposal Contain?
The contents of the CVA 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 who must be a licensed insolvency practitioner (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 insolvency practitioner 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 one month will pass between when you appoint the insolvency practitioner 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.
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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.
What happens after a CVA?
The primary motivation behind entering a company into a CVA is to save to the business and allow it to continue trading long into the future. In fact, a CVA will not be permitted if the business is not deemed to be a viable prospect going forwards. With that in mind, the overarching purpose of a CVA is exactly this - to give the company the opportunity to survive.
Once the CVA ends, any remaining debts which were including in the CVA proposal are typically written off. This should put the company in an advantageous position going forward and those companies who successfully complete a CVA stand as good a chance as any of long-term survival.
Unfortunately, not all CVAs are successful. For those companies which fail to complete a CVA – perhaps through missed payments – the future is not always so promising. The CVA may be able to be modified to allow the company to get back on track, however, in many instances this is simply not possible.
It should be remembered that a CVA is a legal agreement, so should one party break this, e.g. by failing to make the requirement payments on time, the creditor is then able to pursue the debt and take legal action if necessary. This may take the form of a Winding Up Petition which could see the company forced into compulsory liquidation.
CVAs 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 CVAs, a CVA will affect a company's credit score and sometimes companies will find it difficult to receive their normal supplies.
Creditors will accept a CVA in most cases, as repayments typically represent a better return for them than if they forcibly wind up a company. A change in HMRC’s priority for repayment in insolvency cases might affect this, however.
It could make it more difficult to secure the required majority vote if the company owes significant tax arrears – specifically taxes that the business collects on behalf of the tax body.
HMRC ‘s upgraded status to secondary preferential creditor for arrears of some taxes can negatively affect unsecured creditors. The tax body is typically a significant creditor in insolvency cases, and this can influence whether or not creditors accept a CVA proposal.
Do CVAs often lead to administration?
When a CVA is put in place, the premise is that the company will trade its way out of financial difficulty. Circumstances sometimes change, however, and a failed CVA can lead to the company entering administration.
Doing so avoids liquidation initially, and provides an eight-week ‘breathing space’ for the administrator to determine the best course of action. This might include a pre-pack administration sale of the underlying business assets, potentially to the existing directors.
If a CVA does lead to administration, whether that is ‘standard’ company administration or pre-pack, it can provide directors with an alternative route that avoids liquidation.
What happens if CVA proposals are rejected?
Company voluntary arrangements typically offer a better return to unsecured creditors than compulsory liquidation, because unsecured creditors lie at the bottom of the hierarchy for repayment.
If a CVA proposal is rejected by creditors, however, there may be other options available to the company. Administration and pre-pack administration could be viable options depending on each business’ situation.
Sometimes liquidation is the only route, however, and a Creditors’ Voluntary Liquidation (CVL) takes place. This protects creditor interests and allows directors to fulfil their legal obligations, but the licensed insolvency practitioner advising the company will assess the best route if a CVA proposal is rejected.
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