Are you considering a Company Voluntary Arrangement (CVA) for your business? If your company has reached a point where meeting legal and financial obligations seems almost impossible due to mounting debts, a CVA may well be on your radar.
In this article for business owners, we'll walk you through the ins and outs of CVAs.
What is a Company Voluntary Arrangement (CVA)?
A Company Voluntary Arrangement (CVA) is a UK legal process to help struggling businesses tackle their debts.
Under a CVA, Directors stay in control while managing the company to benefit creditors like HMRC, commercial landlords, and suppliers. They can continue running the business as usual but need court approval for major decisions.
A CVA aims to repay debts within a specific timeframe.
What types of businesses can use a CVA?
If your limited company is facing insolvency, it can opt for a CVA to repay creditors within a specific timeframe, and, with creditor approval, the company can keep operating.
If you're a sole trader or self-employed, a CVA isn't appropriate. Instead, you should apply for an Individual Voluntary Arrangement (IVA).
Under what circumstances is a CVA suitable for businesses?
A CVA can be a good option for businesses facing insolvency or where debts are higher than assets. However, a company can only apply for a CVA if:
The company is seen as capable of recovering by both the directors and insolvency practitioners;
Cash flow forecasts show that a business can cover the agreed repayments.
What are the benefits of a Company Voluntary Arrangement?
CVAs can be a good option for struggling businesses that have a good chance of turning things around with the right support. Key advantages include:
Director control
Under a CVA, directors can continue managing day-to-day operations.
Support from an Independent Litigant in Person
In a CVA, an independent Litigant in Person makes sure that the terms of the arrangement are upheld and can represent the company in court hearings.
Reduced pressure from creditors
CVAs come with structured repayment plans which are agreed upon by all parties involved and enforced by the courts. This means creditors can't constantly hassle you for repayment, taking the pressure off and allowing managers and directors to focus on improving the business without unnecessary stress.
Lower costs
CVAs typically have lower administration costs compared to other insolvency procedures like receivership or liquidation. Unlike pre-pack administration, there are no up-front fees for buying back business assets.
Protection from legal action
Creditors can't initiate winding-up petitions or take legal action against business owners under a CVA. This means you won't face unexpected visits or have your assets seized. Additionally, frozen business bank accounts can be unfrozen with a validation order.
What are the disadvantages of a Company Voluntary Arrangement?
While CVAs may offer a compelling solution for companies facing insolvency, they may not be the best fit for all businesses. Here are some key disadvantages to consider:
Impact on credit rating
A CVA can affect your credit rating, making it harder to secure credit agreements with new suppliers or negotiate existing deals. While some debt may be written off as part of the agreement, the interest on the remaining debt can strain your company's cash flow.
Need for stakeholder agreement
Securing agreement from 75% of creditors and 50% of stakeholders is necessary for a CVA to proceed. However, not all stakeholders may be willing to agree, as they lose the ability to pursue repayment and may receive less than what they're owed.
Lengthy duration
CVAs can last anywhere up to five years, with a typical duration of at least three years. This lengthy timeframe may not be appealing for some businesses, as it can create a sense of uncertainty or affect long-term planning.
Preference for Pre-Pack Administration
Some directors may prefer pre-pack administration over CVAs due to personal preferences or specific business needs. Seeking legal advice from a money, tax, and debt solicitor is important to decide the most suitable insolvency process for your situation.
Non-adherence by secured creditors
Secured creditors, such as those with loans backed by assets like property, can reclaim their assets despite the CVA. For example, a commercial landlord with a mortgage on your commercial property may still have the right to reclaim the property.
What's involved in the CVA process?
The Company Voluntary Arrangement process involves several steps:
Contact an insolvency practitioner to assess whether a CVA is a right option for your organisation or if another procedure would be more suitable.
Appoint an insolvency practitioner to handle your case;
Directors review the proposed CVA. If agreed, you can proceed. If not, amendments can be made.
The agreed CVA is filed with the Court and copies are sent to creditors. Creditors' and shareholder meetings are scheduled.
A meeting is held where revisions and amendments to the proposal are discussed. While creditors may not always attend, they may send representatives.
Both creditors and shareholders vote on the proposals. At least 75% of creditors and 50% of shareholders must vote in favour of the CVA to pass.
If the proposals are accepted, the insolvency practitioner compiles a report and sends it to all parties within four days.
Once a CVA is accepted, creditors can no longer pursue legal action against a company during this time. Instead, trustees agree to make regular payments to a trust account as part of the arrangement.
What's included in a CVA proposal?
CVA proposals must follow The Insolvency Act guidelines. They must include:
Details about the insolvent business;
Confirmation that the nominee is a licensed insolvency practitioner (IP);
Overview of the company's operations, including employees, premises, and assets;
Information about creditors and debts.
During the drafting stage, you'll need to provide extensive supporting documents and information to the IP. This information will help them understand your situation and create a proposal with the best chance of resurrecting your business.
Who is involved in a CVA?
Normally, individuals and groups involved in a CVA include:
Company directors;
Creditors (including HMRC);
Stakeholders;
An insolvency practitioner.
How long does a CVA take?
Usually, it takes an insolvency practitioner about one month to draft a proposal for creditors and shareholders. Following this, a creditors' meeting is usually scheduled 2 to 4 weeks later.
In total, you should expect it to take anywhere between six to eight weeks to establish the CVA process. Once in place, the CVA typically lasts for the duration of the agreed repayment plan, which is usually between two to five years.
How much does a CVA cost?
Starting a CVA involves paying an insolvency practitioner to propose the arrangement to creditors. This fee, known as the nominee's fee, can vary, typically ranging between £5,000 and £10,000.
In addition to the IP fee, there are oversight costs for managing the arrangement, determined by creditors, and the agreed-upon costs of the debts.
Compared to other insolvency practices, such as liquidation or receivership, setting up a CVA and making repayments tends to be less expensive. Unlike pre-pack administration, there's no need for lump sum payments to purchase assets.
You'll also cover the cost of the creditors' meeting upfront, with ongoing expenses deducted from the monthly repayments to minimise the impact on your working capital.
What happens after a CVA?
Once a CVA is agreed upon and in place, the business's main goal is to survive and regain profitability. A CVA won't be approved if the IP and creditors don't believe your business can recover.
At the end of the process, and after making periodic debt payments, any remaining debts should be written off.
However, some companies don't complete the process, often due to missed payments. If payments are missed, creditors can resume chasing and take legal action. This could involve a winding-up petition, leading to compulsory liquidation of your business.
What happens if a CVA proposal is rejected?
If creditors and stakeholders reject your CVA proposal, you might need to look at other insolvency practices, such as administration or pre-pack administration.
How does a CVA affect employees?
Entering into a CVA can affect employees, so it's important to consider their welfare. This is particularly true if you need to review employee salaries and consider making cuts.
A CVA can also create a tense atmosphere which may be stressful for employees if they aren't sure what is going on.
Before deciding on a CVA, you should understand how it will impact your employees. Rushing in without considering these factors could negatively affect your workforce.
How can Lawhive help?
If you need help with legal matters concerning your business, including issues related to money, tax, and debt, Lawhive is here to help. We offer free case evaluations to help you understand your situation better.
Contact us today to get started.