Company Voluntary Arrangement (CVA)
Pressure from creditors but need more time to come to an arrangement?
A CVA 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 CVA 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 CVA 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.
- What will happen to my company’s debts?
When a CVA is approved all unsecured debts are effectively frozen and the creditors cannot take any action to enforce their debts as they will be bound by the terns of the CVA proposal
- Can I still be a director?
The simple answer is Yes. One of the underlying principles of a CVA is that as far as the insolvency practitioner ie the Supervisor is concerned, the process is intended to be ‘light touch’ in that the Supervisor does not have any involvement in the day to day running of the business and this is left very much to the directors. The directors of a company in a CVA remain in control of the business and continue to be responsible for the company’s trading whilst complying with the terms of the CVA proposal
- Will a CVA affect my credit rating?
The fact that a company has entered into a CVA is a matter of public record and therefore it is more than likely that this will have an adverse effect on a company’s credit rating. It is not unusual for existing suppliers with debts caught in a CVA to require payment on a pro forma basis for any ongoing trade
- What happens if a CVA fails?
When a CVA fails the Supervisor will be obliged to issue a Certificate of Non Compliance and inform the creditors of the failure. What happens thereafter depends on the terms of the proposal. If the Supervisor is obliged to petition for the company to be wound up through the Courts then he or she would normally instruct solicitors to make the necessary applications. If there is no such stipulation, then upon the issuing of the Certificate of Non Compliance the protective bubble which effectively protected the company from its creditors during the currency of the CVA is burst, and creditors are once again free to take whatever action they deem appropriate to enforce their debts against the company
- What happens when a CVA is completed successfully?
Creditors will be informed of the successful completion by the Supervisor who will ensure that creditors receive the dividend return (the “pence in the pound”) on their debts as set out in the CVA proposal. This is in full and final settlement of their claims against the company. Any balance will be written off in the books of account of the creditors. The Supervisor’s role having been completed, he or she will step down and return the company to the directors and shareholders
- What are the advantages of a CVA for my company?
The principal advantage of a CVA is that in enables the company to continue whilst making a return to its creditors
- What are the advantages of a CVA for creditors?
Creditors are likely to receive a better return on their debts than if the company went into liquidation
Creditors retain an ongoing relationship with the company
- What are the disadvantages of a CVA for my company?
Whilst in a CVA it is likely that suppliers will insist on being paid on a pro forma basis rather than extending any further credit. This will have to be factored into the company’s cash flow projections
A CVA will only succeed if the company generates sufficient income to cover its normal trading expenses and also make a contribution into the CVA ‘pot’
- What are the disadvantages of a CVA for creditors?
Creditors will often have to be patient to get all or some of their money back as typically CVA’s can last up to 5 years