Company Voluntary Arrangement (CVA)
A CVA (Company Voluntary Arrangement) is a method of repaying creditors some or all of their debts whilst allowing the company to continue trading.
A supervisor / insolvency practitioner will be appointed to oversee the CVA.
The supervisor’s role is to ensure that the terms of the CVA proposal are met.
The supervisor does not get involved in the day to day running of the company. Once a Company Voluntary Arrangement is approved by creditors the running of the company is returned to the directors and shareholders.
The supervisor will usually review the company’s financial performance on a six monthly or yearly basis. This is to ensure that the company is complying with the terms of the CVA proposal – for example making monthly contributions for the benefit of creditors.
There is no predetermined length for a CVA. Typically, they can last up to five years.
The IP will assist the directors in putting together the proposal.
A CVA must be approved by 75% by value of creditors voting.
The proposal must demonstrate that for creditors, a Company Voluntary Arrangement offers a better return than a liquidation.
The proposal must therefore be realistic as far as the company is concerned, i.e. can surplus income be generated and paid into the CVA, and also sufficiently attractive to creditors that they consider it a better alternative to liquidation.
Those CVAs which succeed are ones in which the company is able to demonstrate to creditors that appropriate economies/reorganisations of the existing business have been made to enable a more profitable business to continue in a CVA. In short, creditors will ask “What’s new?” Creditors are unlikely to vote in favour of a CVA if they cannot be convinced that significant changes have been made that will prevent the company from repeating its past mistakes.
It is essential that all HMRC returns for VAT PAYE/NIC and corporation tax are filed up to date, even if the taxes have not been paid. If they have not been filed this will delay the voting process.
The first thing which the IP will do is to satisfy himself that the company is capable of preparing a proposal which will be suitable to put to creditors.
The IP will require sight of up-to-date financial and operational information and profit, cash flow forecasts demonstrating future sustainability.
Company directors will need to contact the secured creditors – i.e. the bank, to ensure ongoing support and advise future repayment plans.
A formal proposal document is then compiled, incorporating the relevant forecasts.
The IP, acting as Nominee, will review the proposal and prepare a report to the court (The Nominee’s Report).
Within 28 days of the court receiving the Nominees report, the IP must call meetings of shareholders and creditors at a minimum 14 and maximum 21 days’ notice, in order for the proposal to be considered.
In order to approve a proposal, 75% by value of voting creditors must vote in its favour. In addition, there is another vote excluding connected creditors which must be passed by at least 50% by value of voting creditors.
The proposal must be approved by at least 50% of shareholders.
Once the proposal is approved a record is sent to the Court and to creditors setting out the outcome of the voting and how each creditor voted.
It is now the IP’s responsibility to ensure that the terms of the proposal are complied with.
When a company has formally entered into a CVA, all debts are frozen, no interest can be charged and no creditors may take enforcement action to recover their debt.
View the Government Website page for Company Voluntary Arrangements