Company Voluntary Arrangement (CVA)
What Is a Company Voluntary Arrangement (“CVA”)?
A CVA is in effect a deal between the company and its creditors in full satisfaction of its debts and is an alternative to the company being forced into Liquidation. It enables a company that is insolvent to stay in business, continue to trade and so save jobs.
A CVA is prepared with the assistance of a Licensed Insolvency Practitioner and the directors of the company will propose what is to be paid based on the company’s ability to pay. Creditors can then either accept or reject the proposal and if the required majority of creditors accept the proposal, the proposal is binding on all creditors even if they voted against. The company is then free to continue trading without the threat of closure and liquidation.
The Basis Of a CVA
Typically the CVA will involve the payment of monthly voluntary contributions for a period of three to five years. It may also include the realisation of assets not required for ongoing trading . The amount that is offered will be whatever the company can reasonably afford and will be backed up by cash flow and profit forecasts to demonstrate that the amount being offered is the optimum that the company can afford without being unrealistically high. Typically, creditors will receive 25-50% of their debt and when the CVA is concluded the remainder of their debt is written off. Each case is unique and is assessed on its merits and the amount that creditors will receive will depend upon what the company can afford to pay.
How the Process Works
The setting up of a CVA will usually take four to six weeks from initial instructions to the meeting of creditors. The start of the process is fact finding and evidence gathering where full details of the company’s affairs, creditors details, assets and cash flow are obtained. The CVA proposal is then drafted and once agreed by the directors is signed, lodged in Court and then sent to all creditors.
A meeting of creditors is then held at which creditors can either vote in favour of the proposal, vote against the proposal or vote in favour of the proposal subject to modifications. The directors must agree to any modifications that are proposed for them to be binding on the proposal. The meeting of creditors is often just a paper meeting as creditors will submit their votes by post prior to the meeting.
For a CVA proposal to be approved creditors must vote in favour and a majority of 75% by value of creditors who actually vote is required. Once the proposal is approved it is binding on all creditors, even if they did not vote or voted against.
Once a CVA proposal has been approved creditors can no longer take any action against the company. They can only claim their share of the dividend due to creditors from the CVA. The company is of course also bound by the terms of the CVA and must do what was promised in the CVA proposal.
The voluntary contribution payments will be paid by the company into the CVA fund which is managed by the Insolvency Practitioner. It is the money in this fund that is used to pay the creditors. The Insolvency Practitioner will agree creditors claims, ensure that the company is paying the correct amount and when sufficient funds have accrued, will pay a dividend to creditors.
At the end of the CVA period the company is released from its outstanding debts and is free to move forward and prosper.