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Creditors Voluntary Arrangement CVA

A CVA prevents legal action by creditors - Return to profitability while maintaining your customers

Writen by:

John A Waller

Director

Reviewed: May 9th 2021

Company Voluntary Arrangement (CVA)

What is a Company Voluntary Arrangement (CVA)?

company voluntary arrangement (CVA) is a legally binding procedure that permits a limited company to:

  • Settle debts by paying only a percentage of the amount owed to creditors of the company;.
  • Come to another agreement with company creditors in the payment of their obligations.

A CVA is part of a company rescue and recovery package insolvency practitioners use to help struggling limited companies that are viable to continue trading while protecting themselves from creditors.

  • Write off a considerable debt as a percentage owed;
  • Your business still trades on;
  • Existing contracts are retained;
  • Pay only what your company may sustain;
  • CVA may reflect the seasonality of your business cash flow.

A Formal Agreement

A company voluntary arrangement remains a formal agreement between the failing company and its creditors. The agreement then allows you as the director to keep control of the company and continue trading. Therefore, allowing you time to deal with creditors.

Used for Limited Companies registered in England and Wales.

A CVA with or without a moratorium to help distressed companies. May assist your company in avoiding the outcome of statutory demands and winding-up petitions—action by creditors. Moreover, once approved, it removes creditor pressure either by excluding historic debt or allowing you to unblock and remove outdated accumulated debt.

The details of each CVA will then vary depending on the company’s situation. The essence that the company’s debt, whether in full or part, will be repaid over time from future trading profits (or capital realisations) of the company as cash flow allows. Not all debts are paid, but only an agreed percentage. Unsecured Creditors usually receive more in a Company Voluntary Arrangement (CVA) in the long run than in a Liquidation.

Secured creditors’ security is then not affected.

A CVA does not bind preferential creditors without their authority. Secured creditors can then vote, though only in respect of the unsecured part of their claim.

For further expansion on insolvency, please read ‘what is company insolvency in the UK?

Company Directors Trading when in financial difficulty

Company Directors should take extreme care when contemplating trading through financial difficulty, particularly when insolvent. At times of insolvency, it’s a director’s legal duty to put the interests of creditors of the company before those of the company. Early and in-depth discussions with an experienced insolvency practitioner are essential to explore business recovery options available to secure the interest of creditors.

Cost to Propose a CVA?

The most significant cost you will have to cover in setting up the arrangement is the cost of instructing an insolvency practitioner to prepare and submit the CVA proposal to creditors for approval on your behalf. 

Refereed to as nominee’s fee, it will vary depending on the:

  • Work involved preparing proposal;
  • Details of your case, 
  • Insolvency firm you employ. 

Nominee fees usually range between £5000 and £10000. However, the companies creditors decide on the cost of supervising the CVA. 

The fees Insolvency Practitioners receive are from the monies paid to creditors in the CVA, as they agreed on them. 

We’ve helped many businesses bypass liquidation and dissolution through using a CVA. Contact the team at HBG Advisory for a free, confidential consultation.

CVA’s can be practical solutions for limited companies that need to retain specific certifications or contracts that directors cannot transfer to another company. However, directors must remember that drawbacks exist with a CVA. For example, a CVA impacts a company’s credit score, potentially affecting companies’ ability to gain future credit and open trade accounts.

Legislation controlling Company Voluntary Arrangement (CVA) in the UK

The CVA procedure is set out in the Insolvency Act 1986, Part I (as amended by the Insolvency Act 2000 (IA2000), the Enterprise Act 2002 (EA2002) and the Small Business Enterprise and Employment Act 2015 (SBEEA 2015) and the Insolvency (England & Wales) Rules 2016, Part 2.

Does a creditor voluntary arrangement apply to a single trader?

No!

If you’re a sole trader or self-employed, apply for an Individual Voluntary Arrangement (IVA).

When will a Company Voluntary Arrangement (CVA) be most helpful?

  • Encountering liquidation and wanting to avoid closure;
  • Requires restructuring to be successful;
  • Short term financial stability affected by late payers and bad debts;
  • Viable business with a solid order book, though restrained by short-term cash flow issues;
  • Concerns over liabilities owed to suppliers and their protection;
  • Unable to negotiate repayment plans with creditors;
  • Retain day-to-day control of the company;
  • Capacity to be profitable once creditor pressure removed.
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A Company Voluntary Arrangement with its creditors, once agreed by 75% of the creditors of the company, remains a legally binding agreement. The effect is that the company’s creditors may agree to write off a proportion of debt owed with your company’s creditors during preparation and review, reducing the amount repaid over a reasonable period for the company. Normally 60 months.

Is your struggling company eligible to even propose a CVA?

Many companies present as failing companies, and so fail the opportunity to have a CVA. If your business model shows, it is not viable. Then creditors usually reject the request.

To successfully propose and comply with a CVA, your company needs to have all the following characteristics:

  • Has, at some point, demonstrated a viable, profitable business model. If your model can’t show profitability, then a CVA will not be plausible.
  • When you consider submitting a CVA, your company must be insolvent. To test this is simple. Your company shows as insolvent either using a balance sheet test or cash flow.
  • A viable road to recovery. Creditors want to anticipate future positive cash flow while demonstrating recovery financially and even more robust management.

Is A Company Voluntary Arrangement (CVA) An Insolvency Procedure?

Yes. Though not a closure insolvency process. The arrangement, however, remains hallowed in insolvency law. (Part 1 of the Insolvency Act 1986).

A CVA is considered an Insolvency Business Rescue procedure. It allows companies breathing space to recover.

Drafting a Company Voluntary Arrangement (CVA)

The drafting of the CVA proposal includes:

    • Why the financial dilemma of the company has happened;
    • The latest information considering the company’s financial position, including details of its assets and liabilities;
    • What the company can afford to pay monthly from the financial projections;
    • How much it will pay a month which creditors will receive on a pro-rata basis;
    • The predicted term of the CVA.

HMRC Support during Coronavirus COVID19 pandemic.

The HMRC are offering support to UK businesses during the coronavirus COVID19 pandemic. For further reading, please view HMRC support for contractors during the pandemic.

Advantages and disadvantages of a Company Voluntary Arrangement

The Advantages Of Entering A CVA:

    • Means the role of directors does then not change;
    • Then helps you turn around your business;
    • A CVA protects the company from creditor pressure;
    • This removes pressure from HMRC while the CVA prepares. CVA moratorium;
    • Once a CVA is accepted, no investigation takes place into the company or the conduct of the directors; 
    • The amount paid in instalments for up to five years;
    • You may then write off a significant amount of the company’s debts;
    • Improves the flow of cash;
    • Then a legally binding agreement;
    • Helps your business then re-establish relationships with its creditors;
    • The company may terminate employment contracts, leases, and excessive supply contracts, then with no cash cost penalty;
    • Onerous lease may be terminated;
    • Often customers are unaware that the company remains in a CVA. Negative PR issue reduced if any;
    • Tax losses offset against future earnings;
    • No directors conduct report;
    • Directors remain in control;
    • A CVA cost is cheaper than to appoint administrators.

A potential benefit of a CVA depends on the size of the company. Smaller UK companies experience financial problems and wish to propose a CVA to creditors, holding the opportunity to apply to the Court for a moratorium. A moratorium then stops any creditor action against the company whilst it seeks an agreement, with all the company creditors to sort their debt situation.

Medium and large-sized limited companies not afforded this.

Not having the ability to have an automatic moratorium limits a CVA. Therefore, CVAs often combine with a company administration, enabling the company to benefit from a moratorium from being in administration.

The Disadvantages of entering into a CVA

  • Does not bind secured lenders;
  • Affect the company’s credit rating;
  • A creditor owed 25% or more has the opportunity to steer the vote and the final terms of CVA;
  • Requires shareholders to agree;
  • The company proposing CVA then needs to generate profits to fund past debt in the CVA proposal.

Administration or Company Voluntary Arrangement?

Administration 

A company administration is a formal procedure in which an insolvency practitioner acts as the administrator and takes control of the company to recover. 

CVA 

A CVA helps shield your company while providing a greater return, usually to its creditors, than perhaps an administration may achieve. The directors, however, remain in charge of the company and remain to trade. 

Business Impact 

  • Administration can affect customers’ goodwill
  • CVAs allow a company to continue to trade

Business Control

  • Administration Puts an Insolvency Practitioner in Control of the Business
  • CVAs Allow Directors to Keep on Trading

Restructuring

  • Pre-Pack Administration – an option if company debts too big for a CVA
  • CVAs afford the time to sort matters

What effect does a CVA have on creditors?

Once confirmed, the CVA binds all the unsecured creditors of a company entitled to vote on the CVA proposal. 

Consequently, a CVA binds creditors who:

  • Voted against the CVA;
  • Decided not to vote;
  • Did not get the CVA proposal.

Once bound by a CVA, a creditor is prevented from taking steps against the company that the terms of the CVA legally prohibit, as it is a legally binding contract for both the company and its creditors supervised by the appointed licensed insolvency practitioner. 

Investigations into Directors Conduct

  • Administration – means an obligatory investigation.
  • CVA’s No director’s investigation

Tax Liabilities

  • Administration Tax relief can’t be carried forward to Administration. New Tax period created.
  • CVA Can Offset Tax Liabilities

How Long Does A Company Voluntary Arrangement Process Take?

Firstly, once your company has passed the test to ensure the company can survive through a CVA. The directors then prepare and submit a proposal to the companies creditors collectively, while under the help of a licensed insolvency practitioner. The insolvency practitioner appoints a nominee to your company during the process of executing the CVA.

Usually, the CVA process takes one to three months to prepare, then appointed and agreed upon. While in between drafting and accepting, the company is protected from any creditor legal action.

The first stage of achieving a CVA. The insolvency practitioner drafts a CVA for approval of the company’s creditors and the Court. Then the as yet not approved proposal is presented to the Court before the creditors’ meeting.

Assuming the creditors who voted at the meeting of creditors voted for the CVA. 75% of the company’s creditors (measured as creditors by the value of their debt) are required to approve a CVA. The creditors of the company vote on the CVA, which is the central part of the meeting of the creditors.

The process of drafting and having the creditors agree to a CVA should take 90 days or less, depending on how complex the proposal is?

CVA – How long does a Company Voluntary Arrangement process last?

A CVA lasts between two and five years.

Usually, a CVA has a term of two to five years. Each CVA has a different term, as each CVA differs. The sooner the company can settle its creditors, the shorter the term. In exceptional cases, a CVA may even extend further than five years.

The Company Voluntary Arrangement Process?

As Insolvency practitioners, we issue a report that works out an arrangement covering the amount of debt you can pay and a payment schedule. The term could be over one payment or an extended period, i.e. 60 months. Creditors then vote and either agree or disagree with the proposal.

For the Company Voluntary Arrangement (CVA) to be approved and put into place, 75% of creditors entitled to vote by value, then need to vote for creditors.

If approved, the company must keep up with its scheduled payments to creditors. The Insolvency Practitioner monitors the company until the final payment is made, as per the CVA order.

If the company doesn’t keep to its scheduled payments, then any one of the creditors can apply to wind up the business.

CVA – How Does A Company Voluntary Arrangement differ from Liquidation?

A Company Voluntary Arrangement is an arrangement with creditors to pay back outstanding debt at a particular date over an agreed period. Payment is either at 100% or a reduced amount, i.e. 40%. However, a liquidation closes a company, the assets realised, and the money proceeds distributed to creditors.

Does the company that proposes a Company Voluntary Arrangement (CVA) have the advantage of a legal moratorium?

Up to the 25th of June 2020, a CVA proposal for a “small company”, the company could secure an interim moratorium, like the moratorium that applies to a company in administration. Notwithstanding its repeal by the Corporate Insolvency and Governance Act 2020, the former moratorium remains no longer, since its repeal introduced the Part A1 moratorium

No matter how big or small, any company may use the new Part A1 moratorium process instead, though subject to eligibility criteria.

For further reading, please view ‘applying for a moratorium under CIGA 2020‘.

A Small Company – How Then Does It Qualify?

A small company moratorium must then satisfy small company guidelines, where:-

  • Turnover of less than £6.5 m;
  • An administrator not appointed;
  • 50 employees or less;
  • A creditor may then not use enforcement to secure their debt;
  • Administrative receiver not appointed;
  • Assets no higher than £3.26 million on the balance sheet;
  • Moratorium lasts 28 days only;
  • Petition not presented to the company.

CVA – Director’s Personal Guarantees.

All personal guarantees made by directors securing debt for the company shall remain in place during a CVA.

Normally creditors holding certain guarantees of guarantee comply with the terms of the CVA, because this allows them to recover their money. However, a creditor can become impatient and call in the guarantee.

CVA – Unfair Prejudice

Insolvency practitioners may have creditors challenge a CVA; however, quoting ‘unfair prejudice’.

SIP 3.2 (Statement of Insolvency Practice) states that insolvency practitioners must be aware that an equitable balance needs to be struck between the interests of the company requiring a CVA and its creditors.

Let HBG Advisory help you arrange a Company Voluntary Arrangement. For further assurance, view the team at HBG Advisory.

What will happen to a creditor’s winding-up petition if a company’s CVA is approved?

If the applicant is not a majority creditor and is therefore unable to control the CVA approval vote, the petition is automatically dismissed? Or the Court grants the winding-up order? Thus, the CVA binds all known and unknown secured creditors, so it will be rejected,

What happens if the company in CVA does not comply with the terms of the CVA?

The CVA deals with this in most cases. Usually, on the debtor company’s default, the CVA will provide that:

  • The supervisor of the CVA may petition to liquidate the company;
  • Creditors of the company bound by the CVA are no legally restricted by the now failed CVA, allowing them to commence recovery of the outstanding liability;
  • The supervisor of the now defaulted CVA must distribute the company’s assets as part of the settlement of its due obligations.

Options other than a CVA.

Suppose your company finds itself insolvent. Once you have consulted a licensed insolvency practitioner, options depend on the individual circumstances of your company financially.

Many directors consider a CVA to cease creditor pressure and allow your company to sort paying its creditors.

However, the benefits of a CVA may not be the best process, so opt for another solution.

UK’s companies have various insolvency solutions. They include:-

For further reading on a CVA failure, please read CVA Rejection.

Applying for a Moratorium under CIGA

Can a creditor challenge a CVA?

If a creditor was entitled to notice the CVA proposal and feels unfairly prejudiced by the CVA, the creditor could apply to the court for an order cancelling the CVA. You could challenge a CVA if a material violation occurred in the conduct of the procedure used to determine the CVA proposal. 

CVAs in the UK National News

Lately, CVAs are in the national news more than usual. Those entering a CVA are household names and have taken the public by surprise. Indeed, the reality of our economic situation in the United Kingdom has affected well-known high street brands, including LK Bennett and Monsoon.

It is interesting that using a company voluntary arrangement has not courted controversy as previously experienced. It appears those creditors impacted have resigned themselves to the current situation. However, some creditors have challenged CVAs, and they are still ongoing, as examples with Caffe Nero and Monsoon.

CVAs must be reasonable. Failing which creditors may revolt and challenge the proposal. 

Get expert financial help

CONTACT OUR EXPERTS. Meet the Team at HBG Advisory

CVA – Commercial Rents In the UK.

Commercial rents plummet again in the UK.

Since the pandemic, long-standing tenants have again leveraged landlords to reduce rents. Many enter into a CVA and consider other rescue options, like an Administration or a Pre-pack Administration; Closure options include Liquidation.

For the latest news view, please view

” title=”Rents plummeting on the high street”>Polish News

Redundancy payments in a CVA. View redundancy claim.

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