For a business facing a period of financial difficulty, a company voluntary arrangement (CVA) is one of the key solutions that is important to consider. A CVA is a formal insolvency process in which a company that owes debts it cannot afford to pay proposes a new payment plan with its creditors, allowing the business more time to pay its debts.
This has several key advantages and is one of the best ways to resolve challenges with insolvency – it often results in company rescue and recovery, delivers a good return for creditors, and removes creditor pressure by halting any legal action you may be facing. However, it is not suitable in all circumstances, and there are several other strategies you can use to manage business debt. It is important to pursue the most viable solution for your company’s individual circumstances.
One of the most important things you can do if your business is facing debts it cannot pay is to act quickly. If you cannot pay creditors when debts are due, there are steps they can take to recover the debt that can have serious consequences for your company, including taking legal action against you. However, a CVA halts any legal action, provided you continue to meet its terms. By acting quickly, you can determine whether a Company Voluntary Arrangement is the right approach to resolve your problems, combat creditor pressure and usher your business towards recovery.
A CVA will not always be the right approach, so your first step should be to reach out to us for professional guidance. The team at Company Insolvency Advice can discuss your financial circumstances in detail in a confidential consultation and explain the options that are available to you. With experts on your side, your company will have the best chance of returning to financial solvency and you will be able to navigate the difficulties of paying your debts more easily.
For bespoke support tailored to your individual circumstances, call Company Insolvency Advice today on 0800 999 0666, or use our online enquiry form to get in touch. Alternatively, read on to learn more about how Company Voluntary Arrangements work, the steps involved in the CVA process, and the best ways to ensure you can successfully implement the agreement to resolve your organisation’s debt challenges.
How does a CVA work?
Under a CVA, a business has a fixed period over which to pay off its debts. The business calculates what it can afford in terms of monthly payments and the time period over which it can pay the debt. It proposes these to creditors and, if the terms are accepted, the organisation will then make its monthly payments until the debt is cleared.
This is often a suitable solution in cases where a cash flow shortfall has made it difficult for a company to pay off its debts. This type of situation is often temporary, particularly if a business manages its cash flow challenges carefully, and with a CVA in place, the business can avoid the legal actions or other, more serious consequences that come with failing to pay a debt.
Speak to a member of the team at Company Insolvency Advice for guidance on whether a Company Voluntary Arrangement is an appropriate solution to the challenges you are facing.
How does the CVA process work?
If you have determined that a CVA is the right approach to enable your business to resolve its debts, you must familiarise yourself with the process. Depending on the nature of your debts, you may need to negotiate with a number of creditors to put CVAs into place, and it is the responsibility of the debtor to create a proposal for creditors to evaluate. It is best to work with an insolvency practitioner or other business finance expert in these cases, as they can help you to ensure your proposed CVA is realistic for your business to achieve and fair to your creditors. This will give you the best chance of the proposal being approved and your business the best opportunity to make the necessary payments.
Here is a step-by-step breakdown of the process required when a business aims to secure a CVA:
- Assessment: The process begins with the company directors or management team working to assess the company’s financial situation. It is best to work with a licensed insolvency practitioner at this stage, as they can look into your financial circumstances in detail and make their recommendations. If a CVA does not look like the most suitable option, your advisor can also propose a different path to recovery for your company.
- Preparing the proposal: If you determine that your company has a viable future if its debt burden is reduced, and that a CVA is the best approach, you can start to draft a proposal for a Company Voluntary Arrangement. CVA proposals must be approved by creditors, so it is important to calculate what your business can realistically afford to pay back, and over what period of time, but also to ensure that this is fair to the creditor in question. As we have mentioned above, creditors can take legal action to recover their debts instead, so a CVA is not their only option. However, a CVA is faster and more cost-effective to agree and much more likely to deliver a successful return, so creditors are incentivised to agree provided proposals are fair and realistic. When working with an insolvency practitioner, they are responsible for reviewing the proposal and ensuring it complies with legal requirements. They will also prepare a report for creditors explaining the company’s financial position and the proposed CVA terms.
- CVA proposal sent to creditors: The proposal is sent to all of the company’s creditors, including secured, unsecured, and preferential creditors. Creditors are given notice of a meeting where they will vote on whether to accept or reject the Company Voluntary Arrangement. They may also be in a position to negotiate the terms, and the practitioner with whom you are working can negotiate on your behalf as a neutral third party to ensure that the terms of the agreement are fair to all parties.
- Creditors’ meeting: At the creditors’ meeting, creditors have the opportunity to discuss the proposal and ask questions. They then vote on whether to approve the CVA proposal. For the CVA to go into effect, it must receive approval from at least 75% of creditors – this is usually calculated according to the value of their claims, meaning that creditors to whom you owe more money will have a higher share of the vote.
- Supervisor appointment: If all the creditors agree, the CVA is approved. At this stage, the insolvency practitioner is usually appointed as the supervisor of the CVA. The supervisor’s role is to oversee the implementation of the CVA and ensure that the company adheres to its terms. The CVA becomes a legally binding agreement and creditors must halt any legal actions against the debtor provided the business continues to meet the terms of the agreement.
- CVA implementation: The company begins making payments to the supervisor as outlined in the CVA proposal. These payments are typically made from the company’s trading income. The supervisor distributes the funds to creditors in accordance with the agreed terms.
A CVA typically lasts for a specified period, which can be anywhere from a few months to up to five years, during which the company makes regular payments to creditors. At the end of the agreed term, any remaining debts covered by the CVA are usually written off, if they have not been settled.
While you may feel that having a CVA in place means that your company’s debt problems have been resolved, it is important to ensure that you continue to make the payments you owe. If cash flow challenges were the cause of your debt difficulties, it is important to put measures in place to prevent this from happening in the future.
There are several ways to manage cash flow that can help to make sure a business can weather any fluctuations. Speak to the team at Company Insolvency Advice for guidance on the solutions that will help your business to recover and continue trading under these circumstances.
What are the advantages of Company Voluntary Arrangements?
There are several advantages to CVAs that make them one of the best solutions for an insolvent business to recover and return to a strong financial position. Unlike other insolvency procedures, a CVA allows the company to continue trading and avoid closing, preserving jobs and relationships with customers and suppliers. This puts the business in a stronger position to return to good financial standing while it pays off its debts.
Once the CVA is in place, unsecured creditors are legally prevented from taking further legal action against the company or pursuing winding-up proceedings. This offers some extra legal protection and gives you time to implement the wider changes you need to shepherd your company towards recovery.
There are benefits for creditors too: they have a say in the terms of the CVA, which can lead to a more favourable outcome for both the company and its creditors. In some cases, a company can negotiate with creditors to reduce the total amount of debt owed. This makes the debt more manageable, and creditors may be incentivised to agree to this because, under a CVA, they are likely to receive a higher return than by pursuing a winding-up petition or other legal avenues for recovering their money.
Ultimately, companies with a viable future can use a CVA as a means to recover from financial difficulties and return to profitability. This is a significant advantage of a Company Voluntary Arrangement over other insolvency processes, which may result in the closure or sale of a business.
Can I improve my chances of successfully implementing a CVA?
The best way to ensure that a Company Voluntary Arrangement is agreed by your creditors and goes into effect is to work with licensed insolvency practitioners to develop the proposal. Offering the fairest possible terms to creditors is the best way to secure their approval, and the right insolvency practitioner can support you to achieve this while developing the proposal. They will examine your financial circumstances in detail in order to present a fair, realistic and authoritative payment plan.
The company’s financial position and the willingness of creditors to agree to the CVA terms also play a significant role in the likelihood of success, although it is important to say that an insolvency practitioner can negotiate with creditors and draft a proposal that will incentivise creditors to agree. As such, organisations considering a CVA should seek professional advice from insolvency practitioners or legal experts to assess their eligibility and understand the implications of the arrangement.
When is a CVA not a suitable option?
A CVA might be a viable option in a variety of circumstances, and our team can advise you on whether or not it will offer a solution to your business’ debt challenges. However, one type of debt for which a CVA is not an option is a debt to HM Revenue and Customs. In these cases, businesses that are struggling to pay a debt to HMRC should instead pursue a Time to Pay Arrangement. This functions in a similar way to a CVA, so it is important to clarify that it is still possible to implement a payment plan to cover this debt. However, the process is different and it is crucial to seek specialist advice if you wish to take this approach.
If your organisation is facing financial challenges and you believe a Company Voluntary Arrangement might be the answer, get in touch with our team. We can also discuss processes like Company Administration or an Individual Voluntary Arrangement that might be better suited to your business’ circumstances.
Call our team today on 0800 999 0666, or use our online enquiry form to leave your details and we will call you back at a convenient time for you.
