What is a Company Voluntary Arrangement (CVA)?
Posted on 1st October 2021 at 13:06
CVA stands for Company Voluntary Arrangement and it is an opportunity for a company struggling financially to get some breathing space from creditors and restructure in such a way that might save the company from insolvency. To enter into a CVA a company will have to appoint administrators.
After a CVA is organised by a licensed insolvency practitioner formal arrangements are made between the company and creditors to repay debts. This may require some internal restructuring and assets being sold. In some cases the company and it's business model can be saved through partial repayments of outstanding debts.
A CVA is much the same as an Individual Voluntary Arrangement but it is specially designed for limited companies. The idea of a CVA is to protect the business for creditors and historic debts while being the viable core if the business continues to trade. This helps the company to recover and gives it room to negociate with its creditors.
A company may be eligable for a CVA if it is considered to be insolvent or it has appointed a licensed insolvency practitioner. The company must be able to show that it can continue to trade sucessfully without its debts and that it can accumulate enough future captital to repay its debts to creditors.
The CVA Proposal
When a company is struggling financially and cannot pass the cash-flow test or the balance sheet test its creditors might opt to appoint a licensed insolvency practitioner (IP). They will begin by investigating the company's finances and drawing up a proposal or plan to attend to the company's financial affairs.
When the IP has assessed the company's financials and decided on the best way to salvage the business, they will write the creditors with a proposal and invite them to a creditor's meeting to resolve the company's fortunes. A CVA can work in various way to keep the company afloat and pay back crediotrs.
The CVA Moratorium
After a company has appointed an insolvency practitioner it will need some room to breathe. It isn't possible to negotiate a way to save a company and its assets if there is a disproportionate level of debt being offloaded to creditors at the same time. The solution and one of the first actions of an IP is a moratorium.
A moratorium stops bad debt to creditors immediately and gives the company breathing space while the CVA is negotiated. This not only prevents the company from having to honour its debts but it also prevents creditors and third parties from taking actions against it. In this way, the CVA can be effectively organised.
The Creditor's Meeting
The IP will contact creditors to inform them of the CVA and the moratorium, but they will also request a creditor's meeting. A meeting with creditors is required to facilitate a percentage vote of the CVA Proposal. At the meeting, creditors will be given the opportunity to voice any concerns they have about the viability of the proposal.
Creditors will have the option to be at the meeting in person or to vote by proxy - email or post. The company directors are not obliged to be at the meeting and will be represented by the appointed IP, in order for the CVA Proposal to be accepted, 75% of creditors must be in agreement with the proposal on the table.
Insolvency Practitioner Report
Following the appointment of the insolvency practitioner and the meeting with creditors, a report is produced that is distributed to the courts and to the creditors. This report outlines the proposal in detail along with the results of the votes cast by creditors in the meeting. The report is important for several reasons.
Firstly, the courts and creditors must be aligned with the proposal and have a paper copy of the outcome of the meeting. This report also indicated the foundation from which the CVA will move forward. As well as a signatory document it also serves as a legally binding proposal for the upcoming CVA.
Following the insolvency practitioners report and a 75% or over creditor agreement to the proposal, the CVA proccess can be implemented and set in motion. This usually means that all bad debt to creditors is halted and a repayment plan is put in place. This repayments plan serves to pay back creditors over a five year period.
An arranged payment plan will be set up and creditors will begin to receive their agreement payments in full accross a reliable schedule. Should any of these payments be missed or unfulfilled it is likely that the company will enter into compulsory liquidation and the assets sold.
A CVA and Creditors
Once the meeting with creditors has been arranged and a vote has been taken in the insolvency practitioner report is sent to the courts and the creditors. This means the CVA is legally binding and affects all creditors who will not be able to challenge the proposal after a given period.
However, there is a short period of grace for creditors in which they can challenge the proposal and make amendments to it. This is a 28 day period following the approval of the proposal by the courts. Challenges might be made on the grounds of material irregularity, and unfair prejudice (between creditors).
How long does a CVA take?
A CVA can move quicly from the time the company directors appoint a licensed insolvency practitioner. Typically, a CVS takes around 8 weeks on average to arrange from appointing the IP and investigating the company to arranging the meeting the creditors and taking the vote, to then implementing the action.
The average term of a CVA is up to five years. Arrangements will be made to repay creditors within this time frame and failing that there is a strong chance of liquidation. The terms of the CVS agreement will differ depending on the needs of the company and its ability to repay its creditors. In some cases, the five year repayment period can be extended.
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