A Company Voluntary Arrangement (CVA) is a legally binding arrangement between a company and its creditors by means of which some or all of its debts are repaid from future profits over a period of time. This is usually a better prospect than to see the company enter terminal insolvency and every creditor losing their money. If a company has a viable future, but current cash flow problems have resulted in mounting pressure, a CVA may be a good solution.
For a CVA to work, the directors and management must accept the need for change and be prepared to fight for the company’s survival. The directors must be prepared for this and must realise that a running a company in a CVA is harder than liquidating the business. However, by proposing a CVA you are demonstrating that you are trying to maximise creditors’ interests so it can often be viewed positively.
The main advantages of a CVA are:-
How does a CVA work?
Typically a monthly contribution is paid into the CVA. This is then distributed to distributed to creditors.
Are current creditors frozen?
Yes. Once the CVA is in place no enforcement action can be taken by pre-CVA, unsecured creditors.
How long does a CVA last?
Every CVA is different, but most CVAs will run for a period of five years.
What if creditors can’t be repaid in full?
This is often the case, and a dividend to creditors is proposed. This will be a pence in the pound offer. However, for acceptance, the offer must be reasonable and will need to be justified by financial projections.
How is a CVA approved?
75% of unsecured creditors by value must approve a CVA. Remember this is 75% voting on the day. If associated creditors vote, then 50% of non-associated creditors by value must also vote in support.
Who runs the company?
The existing Directors and management.
What are the costs?
Initially, a Nominees fee will be charged. The fee will be largely dependent on the business size, the number of creditors and the degree of creditor pressure. In some cases, the whole of the Nominee’s Fee may not be payable on commencement.
How long will it take to get approved?
This depends on the availability of information. Creditors need to be given 14 days notice of the creditors meeting once documentation is complete. Typical lead time is 4-5 weeks from the receipt of instructions.
What happens if the company can’t make the contributions?
Some leeway is built into the structure on timing of payments but it is important that contributions are maintained. In some cases, creditors may agree to a variation to the agreement. In other cases, the company passes into Liquidation
What happens to my secured creditors?
Although secured creditors do not vote in a CVA, provided they are comfortable with the proposal, they will often deal with the company as before. In most cases, secured lenders prefer to be offered a solution, not a distressed company.
What happens at the end of the CVA period?
Once the agreed period is completed and the supervisor has issued a completion certificate, then the company leaves the CVA state. Any remaining unsecured debts (where partial repayment was approved) are written off and the directors continue to run the business for the shareholders.
A CVA is a very powerful tool to assist the recovery of insolvent companies, but the commitment should not be undertaken lightly or without professional advice. T H Financial Recovery can assist. Should you have further questions, please do not hesitate to ring us on 01282 332222 (Burnley Office) or 01772 641146 (Leyland) or submit an enquiry form.