What is a CVA (company voluntary arrangement)

What is a CVA in Business

What is a CVA in Business? Written by: John A Waller  Consultant. Reviewed: July 21st, 2024.

What Does A Company Voluntary Arrangement (CVA) Mean?

A Company Voluntary Arrangement (CVA) is a legally binding arrangement between a business and its creditors to maintain a viable company in financial difficulties. It allows it to trade without interruption while generally giving its creditors a better return than an administration covering the CVA’s terms. In a CVA, a company proposes an arrangement to commence repayment of debt owed to creditors in either part or full payment over an agreed period. A company can stay in a company voluntary arrangement CVA for up to 60 months once agreed upon and the terms of the arrangement are maintained.

In recent years, CVAs have been used to restructure leases of underperforming properties, most notably in the retail and leisure sectors. They have also assisted in compromising unsecured bonds, significant trade, or unsecured guarantee liabilities.

IMPORTANT: If you do not meet the agreed payment schedule, any of your creditors can apply to wind up your business.

The process of a CVA became part of the UK rescue culture in 1986—the Insolvency Act. The UK government believes it deals with creditors more equitably.

Often, a Company Voluntary Arrangement is referred to as a Creditor Voluntary Arrangement. They are both in the same insolvency process.

Restructuring plan

The more recent Restructuring Plan put in place (Part 26A Companies Act 2006) is a court-driven process that has judicial scrutiny of what a company proposes. The court ultimately ruled whether the Restructuring Plan should be sanctioned or otherwise. However, anecdotal evidence based on a limited sample indicates that the associated costs of a Restructuring Plan are considerably higher than the average CVA.

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A Creditors Voluntary Arrangement (CVA) and Directors credibility.

A CVA’s approval depends on many financial factors. However, if the directors’ credibility is poor, the creditors will be worried about continuing with the same team.

So, ensure you conduct yourselves appropriately when your company is struggling. Be honest with creditors, and many will do their best to help without filing for a winding-up order in complex, significant company restructurings.

What happens to shareholders in a Creditor’s Voluntary Arrangement (CVA)?

A CVA must be approved by over 50% of shareholders. In a company with two shareholders, both shareholders must agree to it.

Most of the company’s shareholders can approve the proposals by value. The CVA will be implemented if the company’s creditors approve the proposal, regardless of the shareholder vote.

A CVA remains a legally binding procedure that allows a limited company to:

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

The process is sometimes referred to as a Creditor’s Voluntary Arrangement. They are both part of the same insolvency process.

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

Is a Creditors Voluntary Arrangement (CVA) fair to Creditors?

Usually yes.

The creditors’ voluntary arrangement process has existed since 1986 and is one of the UK Government’s most recommended methods for rescuing a failing business. Recently, the Government published a report that found the current system fair to creditors.

Advantages of a CVA

A CVA process has numerous advantages: –

  • Provides breathing space;
  • You do not need to let the customer know you are in a CVA;
  • Cash flow improves. creating further working capital;
  • No public announcement was advertised;
  • It can prevent proceedings from being issued against a company;
  • It is flexible, legally binding, and offers protection from creditors;
  • Companies continue to trade with directors, maintaining control;
  • It assures creditors that the CVA will repay some debt;
  • The company directors can restructure a company to improve profitability;
  • The repayment of debt consolidates into a single monthly payment;
  • Lower cost;
  • Suppliers may continue trading with the company.

Company Voluntary Arrangement (CVA) – Who may propose a CVA?

Directors, appointed company administrators, or a liquidator may propose a CVA. Company creditors, along with shareholders, may also propose a CVA.

Who qualifies for a CVA?

A limited company has an arrangement similar to an individual and an individual voluntary arrangement (IVA)

A CVA allows insolvent but viable limited companies to ring-fence their businesses while arranging to repay their debts without liquidation.

Who can challenge a CVA?

Persons allowed to vote on the proposal can appeal against the CVA by appealing to the Court within 28 days of the date the vote is filed.

CVA or Administration?

Which is the best CVA -V- Administration?

  • A CVA preserves a business, usually a better return to creditors than a company administration;
  • In a CVA, a company proposes to repay part or all of the money it owes to its creditors over an agreed period;
  • The insolvency practitioner does not investigate the director’s conduct, as it is with an administration;
  • The administration often affects customer goodwill;
  • Write off a considerable debt as a percentage owed;
  • Your business still trades on;
  • CVA’s allow the company time;
  • Existing contracts are retained;
  • Pay only what your company may sustain;
  • A CVA may reflect the seasonality of your business cash flow;
  • CVA can offset tax liabilities;
  • CVA’s allow the company directors to keep on trading;
  • Directors remain in control in a CVA;
  • The administration has an Insolvency Practitioner controlling the Business;
  • The administration starts a new tax period. Therefore, tax losses do not carry forward to help reduce tax liabilities on gains in the future.

A Formal Arrangement.

A company voluntary arrangement remains formal between the failing company and its creditors. The arrangement allows you, as the director, to control the company and continue trading. Therefore, it will give 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. It may assist your company in avoiding the outcome of statutory demands and winding-up petitions—actions by creditors. Moreover, once approved, it removes creditor pressure 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 is that the company’s debt, whether in whole or part, will be repaid over time from future trading profits (or capital realisations), 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 vote only regarding the unsecured part of their claim.

For further expansion on limited company rescue and recovery, it is important that company directors understand what company insolvency is in the UK.

Drafting a Company Voluntary Arrangement (CVA)

Drafting a CVA proposal includes:

    • Why the company’s financial dilemma 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 will it pay a month? Which creditors will receive on a pro-rata basis;
    • The predicted term of the CVA.

Preparing the CVA

  • Preparing a Proposal

Once the directors agree to propose a CVA, they must choose a licensed insolvency practitioner (IP) to prepare the proposal for the creditors to approve. Once engaged, the IP can begin collating the financial information required to draft a proposal. The directors need to agree to put the proposal before the creditors first. Once agreed upon, the IP can forward the proposal to all company creditors to be voted on at a creditors meeting.

During the preparation of the proposal and waiting for the meeting. Company directors can, therefore, choose to use a moratorium to protect the company from creditors until the creditors meet.

  • The Meeting of Creditors

A meeting will be held to invite all company creditors to discuss and vote on the proposal. Creditors who cannot attend may submit a proxy.

  • Report by the appointed IP

Upon agreeing on the CVA, the IP assumed the role of Supervisor. They will submit a report of the meeting to all creditors and one to the courts. A CVA is a legally binding arrangement on both sides. Once agreed upon, creditors have 28 days to challenge the arrangement.

  • Operation of CVA

The company will be required to make the payments per the arrangement with the IP. The creditors’ debt is now with the arrangement and may take no further recovery action.

However, should the company maintain the payments as agreed, the company shall be wound up and suffer a compulsory liquidation.

Is your struggling company eligible to even propose a CVA?

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

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

  • Has demonstrated a viable, profitable business model at some point. 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 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.

Company Voluntary Arrangement (CVA) – Company Directors Trading when in financial difficulty

Company Directors should exercise extreme care when contemplating trading through financial difficulty, particularly when insolvent. It’s a director’s legal duty to put the interests of the company’s creditors 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 interests of creditors.

How much does a CVA cost?

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

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

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

Nominee fees usually range between £5000 and £10000. However, the company’s 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 using a CVA. Contact the team at HBG Advisory for a free, confidential consultation.

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

Legislation controlling a 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), the Small Business Enterprise and Employment Act 2015 (SBEEA 2015), and the Insolvency (England & Wales) Rules 2016, Part 2).

Does a CVA apply to a single trader?

No!

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

When will a 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 is removed.

Is A 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.

    • HMRC Support during Coronavirus COVID-19 pandemic.

The HMRC is offering support to UK businesses during the coronavirus COVID-19 pandemic. For further reading, please view HMRC support for contractors during the pandemic.

Advantages and disadvantages of a CVA

The advantages of entering A CVA:

      • This 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 arrangement;
      • Helps your business then re-establish relationships with its creditors;
      • The company may terminate employment contracts, leases, and excessive supply contracts with no cash cost penalty;
      • The onerous lease may be terminated;
      • Often, customers are unaware that the company remains in a CVA. Negative PR issues reduced, if any;
      • Tax losses offset against future earnings;
      • No directors conduct reports;
      • Directors remain in control;
      • A CVA cost is cheaper than to appoint administrators.

    A potential benefit of a CVA depends on the company’s size. 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 to help distressed companies stops any creditor action against the company while it seeks an arrangement with all company creditors to sort out their debt situation.

    Medium and large-sized limited companies are not afforded this.

    The inability to have an automatic moratorium limits a CVA. Therefore, CVAs often combine with company administration, enabling the company to benefit from a moratorium while 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.

    CVA or Administration

    A CVA can preserve the business, often producing a better return for creditors than an administration.

    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. 

    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 a company’s debts are too big for a CVA
          • A pre-pack sale of a company involves the sale of all or part of a company’s business and/or assets. This is negotiated and agreed upon before an insolvency practitioner (IP) is appointed administrator.
        • CVAs afford the time to sort matters

    What effect does a CVA have on creditors?

    Once confirmed, the CVA binds all the company’s unsecured creditors 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. The CVA is a legally binding contract for the company and its creditors supervised by the appointed licensed insolvency practitioner. 

    Investigations into the Director’s Conduct

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

    Tax Liabilities

        • Administration Tax relief can’t be carried forward to the Administration. A new Tax period was 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 it can survive through a CVA, the directors collectively prepare and submit a proposal to the company’s creditors with the help of a licensed insolvency practitioner. The insolvency practitioner appoints a nominee to your company while executing the CVA.

    Usually, the CVA process takes one to three months to prepare. Then, the company is appointed and agreed upon. In between drafting and accepting, the company is protected from any legal action by creditors.

    The first stage of achieving a CVA is for the insolvency practitioner to draft a CVA for approval by the company’s creditors and the Court. Then, the proposal, which has not yet been approved, is presented to the Court before the creditors’ meeting.

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

    Should drafting and having the creditors agree to a CVA take 90 days or less, depending on the proposal’s complexity?

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

    A CVA lasts between two and five years.

    Usually, a CVA lasts two to five years. Each CVA differs, so the term is different. 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? – Time to finish?

    As Insolvency practitioners, we issue a report that works out an arrangement covering the 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 agree or disagree with the proposal.

    For the Company Voluntary Arrangement (CVA) to be approved and implemented, 75% of creditors entitled to vote by value must vote for creditors.

    The company must keep up with its scheduled payments to creditors if approved. Per the CVA order, the insolvency practitioner monitors the company until the final payment is made.

    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 100% or a reduced amount, e.g., 40%. However, a liquidation closes a company, the assets are realized, and the proceeds are distributed to creditors.

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

    A CVA proposal for a “small company” could secure an interim moratorium, like the one that applies to a company in administration, up to June 25, 2020. 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

    Any company, regardless of size, may use the new Part A1 moratorium process instead, though it is subject to eligibility criteria.

    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.

    Usually, 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 but cite ‘unfair prejudice’.

    SIP 3.2 (Statement of Insolvency Practice) states that practitioners must know how to strike an equitable balance between the company’s interests, 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?

    Is the petition automatically dismissed if the applicant is not a majority creditor and cannot control the CVA approval vote? Or the Court grant 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 not 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 your company’s financial circumstances.

    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:-

    Applying for a Moratorium under CIGA 2020.

    Can a creditor challenge a CVA?

    If a creditor was entitled to notice the CVA proposal and felt 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 during the procedure used to determine the CVA proposal. 

    CVAs in the UK National News

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

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

    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.

    Contains public sector information licensed under the Open Government Licence v3.0.

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