Company Voluntary Arrangements (CVA)
- What is a voluntary arrangement?
- Should Your Company Propose a CVA to its Creditors?
- Is your company eligible for a Company Voluntary Arrangement?
- Why choose a company voluntary arrangement?
- When is a voluntary arrangement a good idea?
- What are the disadvantages of a voluntary arrangement?
- Initiating the company voluntary arrangement process
Do you believe your business could become profitable again? If your business has outstanding debts that it cannot currently repay but has the potential to return to profitability, a Company Voluntary Arrangement could be your best option.
A Company Voluntary Arrangements protects your company against potential legal action by creditors. It also allows your company to simplify its debts and payments by combining several outstanding debts into a single recurring payment plan.
What is a voluntary arrangement?
A voluntary arrangement is an agreement between your company and its creditors to repay its debts over an agreed-upon schedule. Company voluntary arrangements are known as CVAs and are one of several business recovery options.
Voluntary arrangements are only suitable for viable businesses that can repay their creditors within the terms of the agreement. An insolvent business that is not viable cannot enter into a CVA, as it will be unable to repay its creditors.
CVAs have a variety of advantages and disadvantages. As an agreement between two groups – in this case, your company and its creditors – CVAs need to be agreed to by 75% of your company’s creditors in order to become effective.
Should Your Company Propose a CVA to its Creditors?
Is your company viable but struggling? If your business has a viable business model and has fallen onto hard times, a company voluntary arrangement (CVA) may allow it to reach an agreement with its creditors and continue trading.
Voluntary arrangements with creditors allow your company to work out payment terms for your company’s existing debt. An arrangement may give your business a longer payment period to reduce the strain of its debts on cash flow.
A voluntary arrangement might also reduce the amount that your company has to pay its creditors, reducing its financial burden and allowing it to continue trading while repaying its creditors over time.
Is your company eligible for a Company Voluntary Arrangement?
A CVA gives your company breathing room to repay its debts, avoid legal action by creditors and return to profitability. However, not all businesses are eligible or suitable for a CVA. In order to be eligible for a Company Voluntary Arrangement, your business needs to comply with several criteria. Some of the requirements include:
- Your company’s directors and your insolvency practitioner must both have confidence that your company can recover and return to profitability.
- Your company must currently be either insolvent or contingently insolvent (likely to be insolvent after potential liabilities, such as settlements, are taken into account).
- Your company must currently have sufficient cash flow (or projected cash flow) to ensure that enough capital will be raised to make the necessary repayment to creditors on the agreed upon schedule.
A CVA is a binding contract between your company and its creditors. Because of this, in addition to the above criteria, at least 75% of your creditors need to agree to the terms of your Company Voluntary Arrangement in order for it to be approved.
Why choose a company voluntary arrangement?
Entering into a CVA with your creditors has numerous benefits. The first is that it ends pressure on your company from creditors. During the CVA proposal process, statutory demands and other legal threats against your company can be halted.
A company voluntary arrangement also simplifies your company’s outgoing debt payments. Instead of paying multiple creditors separately, your company faces a single outgoing payment for the aggregate of its debts.
As long as your company has the means to comply with the arrangement, a CVA maximises value for your company by improving its cash flow, and for creditors, since it ensures they receive some or all of the debts that are owed to them.
A final advantage of a CVA is its discretion. While winding up orders are published in the Gazette and administration affects your company’s image, a CVA offers your company a discrete way to manage its debts whilst minimising the affect on its reputation.
When is a voluntary arrangement a good idea?
Disruptions to your company’s cash flow, such as late payments from customers or non-payment, can place your company in a difficult financial position. Sometimes, a disruption to cash flow can make your company insolvent.
These cash flow issues can occur even to viable, formerly profitable companies. A voluntary arrangement between your company and its creditors allows you to get your company back on track by simplifying debt repayments.
CVAs are only suitable for viable businesses. In order to propose a CVA to creditors, you and your insolvency practitioner will need to examine your company’s records and reach an agreement that it’s commercially viable.
Proving viability will involve forecasting future cash flow. In order for a voluntary arrangement to be successful, creditors need to know that your company is capable of producing sufficient revenue to meet the terms of the arrangement over time.
What are the disadvantages of a voluntary arrangement?
Voluntary arrangements are ideal for turning around failing but potentially viable companies. While they’re often the best solution, they may not always be the ideal solution for your company. Even successful voluntary arrangements with creditors have some downsides such as difficulty in entering into future credit agreements due to its involvement in a voluntary arrangement.
Initiating the company voluntary arrangement process
Your company can’t propose a CVA on its own – in order to propose a CVA to your creditors, you’ll need to consult an insolvency practitioner.
If your company is insolvent, you have a legal obligation as its director to stop all trading activity immediately and seek assistance. An insolvency practitioner will review your company’s financial situation to determine if a CVA is appropriate.
After your company’s CVA proposal has been drafted, it will need to be considered and agreed to by your company’s directors. The process then involves meetings of creditors and shareholders to vote on whether the CVA should be accepted. In order to be approved, your company’s CVA proposal will need to be agreed upon by at least 75% of your company’s creditors. This means that your CVA must offer a reasonable solution for all creditors of your company and act in their interests.