A Company Voluntary Arrangement (“CVA”) can be seen as a lifeline for a company, as it is a rescue process which allows a company in financial trouble to continue to trade and to reach agreement with its creditors to pay its debts (or part of its debts) over a period of time, typically three to five years, although a CVA can be based on a one off payment in full and final settlement of debts.
A CVA can only be proposed by a company if it is insolvent, and requires the approval of at least 75% in value of voting creditors.
Once approved, the CVA is binding on all creditors irrespective of how they voted and all amounts owing to the creditors are frozen, together with interest and charges, and profits are then generated from continued trading which are used to repay the CVA creditors, whilst the company continues to pay ongoing liabilities in the normal way.
Any secured creditors are typically excluded from the CVA as their debt is subject to security and is also usually required for the business to continue to trade. This would typically include bank overdraft facilities and factoring agreements
A CVA is a very flexible process which can be tailored to suit many circumstances and a proposal for a CVA is prepared by a Licensed Insolvency Practitioner on behalf of the company’s directors. However, the directors remain in control of the day to day management of the company but a Supervisor is appointed to ‘supervise’ the company to ensure it meets the terms of the CVA.
A CVA also usually provides for a much better return to creditors than in liquidation and, as such, is often a more appealing solution to all parties.
In order for a CVA to be successfully implemented, the company must produce the following:
- Cash flow forecasts which evidence that a surplus will be available from which ongoing contributions can be made
- Production of a business plan which evidences that appropriate changes have been made to return the company to profitability
These will then form the basis of the company’s proposals to creditors.
A CVA is an exceptional solution that can be used to restructure the debts of a viable company in order to avoid a business failing. A CVA is appropriate in many situations, for examplewhere a company is profitable but has suffered from bad debts, where a company has cash flow problems, but is able to prove long term profitability or where there is a strong core business but justifiable reasons for current insolvency.
However it is not suitable in all circumstances and advice is needed to determine if a CVA is appropriate, including using the CVA process in conjunction with other rescue procedures.
To discuss Company Voluntary Arrangements please contact Dunion & Co today by calling 01782 828 733 or e-mailing us on firstname.lastname@example.org.