Company Voluntary Arrangements (“CVA’s”) have often been overlooked as an alternative to Liquidation or Administration, however they should be seen as a viable option. In the right circumstances they can bring benefits to both Directors and the Business’ Creditors. A CVA requires the approval of the Creditors in order for it to proceed.

Gareth Hunt explains more:

Company Voluntary Arrangements (“CVA’s”) have been around since the Insolvency Act was implemented in 1986 but the numbers of CVA’s being approved has increased only in the last year. It is a feasible option when the Directors of the Company are prepared to commit themselves to the restructure and rebuilding of the business, and in these circumstances, the returns to Creditors can be significantly higher than in a Liquidation.

What is a CVA?

A CVA is a legally binding agreement between the Company and its Creditors and is dependent upon the Company’s continued trading. The Company and Creditors agree contributions based upon turnover and expenditure for a set period (usually 5 years) and in return the Creditors agree to accept a reduction in their liability.

The main benefit to Creditors in accepting a CVA is that they should receive a greater return than if the Company entered into Liquidation. This is because when a business is liquidated, there are finite assets available and these often attract a reduced valuation. A trading business will have the opportunity to repay the amounts owed by continued trading, concluding contracts and benefitting from existing leases etc.

In order to reach agreement on a CVA, the Directors will be required to take an honest view of the financial position of the Company, its future and the actions required to ensure that it will not only survive but thrive. Creditors will need to be paid the amounts agreed but the Company will then no longer be encumbered by historic liabilities.

How is a CVA approved?

As the CVA is a formal agreement between a Company and its Creditors, it requires Creditor approval. The Directors need to work with an Insolvency Practitioner to prepare a proposal which outlines the proposed CVA, financial information, business plans and information about the Company. The proposals are circulated to Creditors for their consideration.

A CVA requires the support of 75% of Creditors in order for it to be implemented and Creditors can propose modifications to the proposal, e.g. minimum contribution terms.

In instances where there are associated creditors, such as Directors, who are personally owed money by the Business, a second vote is also required. In this case, a simple majority of 50% of creditors, excluding those associated, is required.

Benefits of a CVA

A CVA enables the existing management team to remain in control of the Company and continue to trade which encourages Directors to take early steps to act to rescue the Company without the fear of losing control.

The procedure can be extremely flexible and, dependent on the business structure, can be tailored to all kinds of financial situations. For example, a retailer with several sites may use a CVA to terminate lease agreements on poorly performing sites and continue with the more profitable sites through a CVA.

Whilst a CVA requires greater commitment from Directors, the benefits and flexibility should not be overlooked for both the Company and Creditors.

A Liquidation or Administration may be the appropriate course of action for a Company; but do not overlook the potential benefits of a CVA.

This article is for information only. Please take professional advice relating to your own personal circumstances before making any decisions.