Company Voluntary Arrangement
A Company Voluntary Arrangement (“CVA”) is a formal insolvency procedure for limited companies that does not involve the closure of the business or loss of day to day control by the directors.
A CVA is effectively a contract with the company’s creditors. An insolvency practitioner will assist the directors in writing a proposal to the company’s creditors outlining how the company will repay its debts. The proposal will often offer creditors significantly less than full repayment of their debt and funds will be generated typically from ongoing trading of the business.
The insolvency practitioner will provide a report to creditors stating whether they consider the proposal to be realistic and for the proposal to be accepted by creditors it must be approved at a meeting by at least 75% of the unsecured creditors (by value) who vote. Once approved it becomes binding on all creditors who had notice at the meeting.
By its very nature a CVA is potentially a flexible business rescue procedure and a means to deal with the insolvency of a company that has been caused by adverse historic issues, but where the ongoing business remains viable.
- Once approved, a CVA will protect the company from legal and enforcement action from its unsecured creditors.
- The business continues to trade and remains under the control of the directors.
- Once the CVA is successfully completed all remaining unsecured debts are written off.
- Typically a CVA will last for five years if creditors are not repaid in full prior to that date. Five years can be a long time in business and there may be changes in the company’s markets, products, or the economy in general, any of which may have a significant effect on the company’s actual performance when compared to the forecast results upon which the CVA will be based.
- Fundamental changes may need to be made to the existing business model if the company is to succeed. Changes may incur costs and take time to put in place. Creditors will need to be satisfied that these can be successfully implemented when they vote on the proposal.
- Secured creditors are not bound by a CVA and may take steps to enforce their security or reduce their indebtedness.
- A CVA is a contractual agreement with a company’s creditors and if it is not strictly adhered to it is likely the terms of the proposal will require the company to go into liquidation.
- It is unlikely that the company will be able to obtain credit during a CVA as suppliers will require invoices to be paid on a pro forma basis. Equally it is unlikely that the company will be able to obtain credit facilities from any new supplier.