(Company Voluntary Arrangement)
If your company is insolvent, it can use a Company Voluntary Arrangement to pay creditors over a fixed period.
What You Need To Know
What Is A CVA?
- It’s a rescue procedure for businesses introduced by the 1986 Insolvency Act.
- May be appropriate for Companies with viable business models but cash flow problems.
- It allows an insolvent Company to continue in operation, in contrast to Liquidation.
- The Company makes a proposal to the creditors that may include, for example, monthly repayments over a fixed period of time or an orderly disposal of non-essential assets.
- CVA proposals will typically, but not always, offer creditors only a proportion of their money back. For example, Creditors may be offered 30p in the £ on a pro rata basis in a full and final settlement of their claim against the Company.
- The CVA must offer a higher return to Creditors than they would otherwise expect to see if the Company went into Liquidation.
- There is no set duration, a CVA could last for 3 months or 5 years. Each case is judged on its own merits.
- The CVA is overseen by a Licensed Insolvency Practitioner. He initially sends the Company’s proposal to the Creditors who are given 14 days to decide whether to accept, reject or modify it at a Virtual Creditors Meeting or other Decision Making Process.
- If accepted by 75% of creditors in value who vote at the meeting then the proposal is approved and is legally binding on all the unsecured creditors, including those who didn’t vote and those who rejected the proposal.
- The Insolvency Practitioner becomes the “Supervisor” of the CVA upon its acceptance and he makes sure the scheme is implemented in accordance with the terms of the proposal.
- Once the scheme is fully implemented the Supervisor vacates office and the Company will continue trading, released from the unsecured liabilities that it had at the outset.
A Clear View
What Are The Advantages Of A CVA?
- Unsecured Creditors are ring fenced once the CVA is approved. If there is significant creditor pressure, a moratorium can be obtained in Court before the CVA proposals are circulated, protecting the Company from enforcement action, winding up orders etc.
- Company can continue to trade in its existing legal form, no need to set up a new company. This may be particularly important if, for example, the Company has Vehicle Operator’s Licenses that cannot be transferred.
- The Company retains its assets, if creditors agree, including book debts, premises etc.
- Directors remain in day to day control.
- Significantly lower costs than if trading continued following Administration.
- Better returns to unsecured creditors and also possibly better returns to secured creditors which may be particularly significant if Personal Guarantees have been provided.
- The Creditors have the opportunity of continued trading with the Company going forward.
What Are The Disadvantages Of A CVA?
- Many CVAs fail due to strict conditions being placed by Creditors and because the Company makes overly optimistic forecasts.
- If the Company continues to be loss making it will fail to adhere to the proposals and the CVA will, in all likelihood, fail.
- The CVA is a legal agreement and it may place restrictions on what the Directors can do, for example, in regard to the level of Director’s Remuneration, Dividends to Shareholders etc.
- The proposal may be rigid in terms of what the Company has to pay the Supervisor and the timescales for doing so.
- It will impact on the Company’s ability to get credit from suppliers going forward.
- By entering into a formal insolvency procedure this could have an adverse impact on contracts the Company has, for example, with Finance Companies, Invoice Discounters, Professional Bodies or major Customers.
- A CVA proposal is not confidential, it’s a matter of public record at Companies House and, as such, may hinder the Company’s future growth.
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Next Steps Together
DSi provides expert advice to businesses and individuals encountering financial difficulty. We are a friendly yet professional firm, offering a spectrum of financial solutions to insolvency.
Our experienced team are here to help and do understand that financial problems can be extremely stressful. Our aim is to guide you through this giving straight forward and honest advice.
If you would like to discuss any aspect of CVAs please don’t hesitate to contact DSi Business Recovery to arrange a Free and Confidential meeting on 01924 790880
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