A Company Voluntary Arrangement, commonly known as a CVA, is an agreement between an insolvent company and its creditors.
CVAs typically allow insolvent companies to pay back a percentage of their debts over an extended period of time. Payments are typically monthly and continue for several years, easing cash flow for the struggling company.
Entering into a CVA has numerous benefits for companies and creditors. A CVA is often the most effective way for creditors to recover some of the money that they are owed by an insolvent company.
Not all companies can enter into a CVA with their creditors. A CVA also isn’t always the most effective option. However, in many cases, a CVA gives struggling, insolvent companies an opportunity to facilitate a financial recovery while paying creditors.
Are you interested in using a CVA to save your business? Read on to learn how the CVA process works, whether your business is eligible to propose a CVA and other important information about Company Voluntary Arrangements.
Quick facts about the Company Voluntary Arrangement process:
- A CVA is an agreement with creditors that allows your company to pay off some or all of its debts to creditors via a recurring monthly payment.
- Proposing a CVA protects your company from creditor pressure and legal action such as a winding up petition.
- In certain cases, a CVA may allow your business to write off a percentage of its debts to creditors.
- Since a CVA consolidates your company’s debts into a monthly payment, it can improve your company’s cash flow and make trading easier.
- Not all companies can enter into a CVA. An insolvency practitioner can look at your company’s financial situation and determine if a CVA is possible.
What does a Company Voluntary Arrangement do?
A Company Voluntary Arrangement has several short-term and long-term effects. In the short term, proposing a CVA ends pressure from your company’s creditors, such as letters demanding immediate payment of debts.
In order to prepare a Company Voluntary Arrangement, you will need to speak to an insolvency practitioner. They will review your company’s financial situation and, if a CVA is the most appropriate solution, prepare a proposal for your creditors.
Your company’s creditors need to accept your CVA proposal in order for it to come into effect. In order for a CVA to be approved, at least 75% of the creditors, by debt value, need to vote in approval of the CVA proposal.
Before you consider a CVA, it’s important to understand that not all companies are eligible to propose a CVA to their creditors. If your company isn’t eligible, there are several alternative insolvency solutions that it can pursue instead of a CVA.
Is your company eligible to propose a CVA?
Not all companies are eligible to enter into a CVA. If your company has a business model that just isn’t viable and hasn’t ever produced a profit, it’s unlikely that your creditors will be willing to accept a CVA proposal.
In order to successfully propose and comply with a CVA, your company needs to have all of the following characteristics:
- A history of profitability. Your company doesn’t have to be profitable right now, but it has to have a viable business model that has been profitable at some point in the past and can potentially become profitable again.
- Your company needs to be insolvent to submit a CVA proposal and enter into a CVA, either by cash flow or its balance sheet. Learn more about insolvency in our Guide to Insolvency.
- A path towards recovery. In order for creditors to accept your CVA proposal, it needs to explain your company’s future cash flow and provide a path that leads towards a complete financial recovery.
Does this sound like your company? If you’re insure about your company’s eligibility for a CVA, there’s no need to worry. We can review your company and offer tailored advice about the CVA process and other insolvency options.
What are the advantages of entering into a CVA?
For most insolvent companies, the biggest benefits of a CVA are the core elements of the agreement itself: that it lets your company pay its debts over time and write off a percentage of its total debts to creditors, improving cash flow in the short term.
Beyond these benefits, there are a range of additional advantages of entering into a CVA instead of using an alternative insolvency solution:
- Unlike entering into administration, which results in your company being listed in The Gazette, entering into a CVA does not result in any unwanted publicity for your company.
- Unlike entering into administration, which requires you and other directors to hand over control of your company to an administrator, a CVA allows you to stay in control of your company.
- Unlike liquidation, which could leave creditors with little or no money once your company is wound up, a CVA guarantees creditors a certain amount of their debt over the repayment period.
- If your business needs to make major restructuring decisions, such as making staff redundant or terminating contracts, a CVA is highly likely to be the most effective and appropriate solution.
- As company director, you’re able to remain in control of your business as it works towards financial recovery in a CVA. Your company’s shareholders will also be able to retain their stake in the company.
There are additional advantages to a CVA – that it shields your company from being put under pressure from creditors or that it improves cash flow – but these are not exclusive to a Company Voluntary Arrangement.
Would you like to learn more about the advantages of a CVA? Read more about the unique benefits of using a CVA to save your insolvent company on our Advantages and Disadvantages of a CVA page.
What are the disadvantages of entering into a CVA?
While a CVA is a good option for a viable company with the potential to recover, it’s not always the best one. Insolvent companies have several options, from a pre-pack administration sale to using short-term cash flow solutions like invoice factoring.
In addition to considering the unique advantages of a CVA, it’s also important that you consider the disadvantages:
- If your company breaks the terms of its CVA by missing a payment, it could still end up being wound up by its creditors.
- Entering into a CVA has negative consequences for your company’s credit rating. This disadvantage is common to all insolvency procedures.
- There’s no guarantee that your CVA proposal will be accepted. At least 75% of your company’s creditors need to agree for the CVA to be accepted.
- A CVA is not a short-term solution. Your company could spend several years repaying its creditors before the CVA is completed.
What are the alternatives to a CVA?
While a CVA is almost always the most powerful and effective insolvency solution for companies, it isn’t the only option. Other options for insolvent companies are entering into administration, a pre-pack administration sale and financing.
Entering into administration protects your company against a winding up petition from creditors, but at a cost. Unlike a CVA, administration requires you to give up control of your company to a third-party insolvency practitioner.
Pre-pack administration allows you to transfer some of your company’s assets to a new company. However, there are restrictions on pre-pack administration that can often mean it isn’t a viable solution compared to alternative options.
Financing, whether via a loan or using invoice factoring, could give your company the cash it needs to continue paying its creditors. However, it’s often a short-term solution to a long-term problem that could continue to affect your company.
Finally, there is the liquidation solution. If your company isn’t viable and can’t pay back its creditors, closing the company and allowing creditors to liquidate its assets could be the most appropriate course of action.
Every company is unique, and it’s difficult to know which solution is best for your company without a detailed review of its finances. We can provide detailed advice and information to your company to help you find the best insolvency solution.
Would you like to learn more about the insolvency solutions available for struggling companies? Our CVA Alternatives page compares CVAs to other insolvency solutions.
How long does it take for a CVA to take effect?
The CVA process begins with your company submitting a CVA proposal to creditors through its insolvency practitioner. The insolvency practitioner will then appoint a nominee to your company throughout the process of implementing the CVA.
In most cases, the CVA process takes between one and three months to complete. In the time that the CVA is being prepared and later considered by the creditors, your company will be shielded against creditor-initiated legal action.
During the first phase of implementing a CVA, the insolvency practitioner will draft a CVA for submission to your company’s creditors and the court. This proposal will be submitted to the court before the creditors’ meeting is held .
At least 75% of creditors (measured by the value of their debt) need to accept a CVA in order for it to be approved. Your company’s creditors will vote on the CVA as part of the creditors meeting.
Most of the time, the process of proposing and agreeing to a CVA takes less than 90 days. The CVA period, however, can last from several months to five or more years, depending on your company’s cash flow and ability to repay its creditors.
Would you like to learn more about the CVA process? Our How Does a CVA Work? page explains the CVA process and its results, from preparing a draft proposal to meeting with your company’s creditors.
What happens to your company during the repayment period?
If your company’s creditors agree to its CVA proposal, you’ll receive the agreed upon amount of time to pay back your company’s debts. During this period, your company can trade as normal within the conditions of the CVA itself.
Over time, your company will complete its obligations under the CVA and return to normal trading after the CVA period ends. This is the desired outcome of all CVAs – an excellent solution for your company as well as its creditors.
If, however, your company violates the terms of its CVA and misses a payment, it could face legal action from its creditors. It’s far from uncommon for creditors to submit a winding up petition after a company fails to meet the terms of its CVA.
Is it expensive to enter into a CVA?
While entering into a CVA isn’t free, it’s almost always the most financially beneficial option for your company. A CVA puts you in control of your company and could lead to a large percentage of its debts being written off, saving it money.
The fees associated with a CVA are deducted from the amount your company repays to its creditors. Although there are costs associated with a CVA, entering into a CVA is almost always a better deal for all parties than the company liquidation process.
Does your company need expert help?
Is your company struggling to pay its creditors? Are you under serious pressure to pay from your company’s creditors, such as the receipt of a winding up petition or statutory demand?
If your company is insolvent and incapable of paying its creditors, entering into a CVA protects it against legal action and gives you the opportunity to negotiate the terms of its debt repayment with creditors.
We can review your company’s financial situation and provide the advice you need to make an informed decision. If a CVA is the right option for your company, we can draft a proposal and help your company make its way through the CVA process.
Contact us to speak to an insolvency expert and learn more about the options that are available for your company. We can help you make the right decision for your company’s future and maximise its chance of recovering.