When a business is insolvent or experiencing financial difficulties, there are several options open to it. From liquidation, which liquidates and dissolves the company, to options for business rescue, such as a Creditors’ Voluntary Arrangement (CVA.)
A CVA is an agreement made between company directors and creditors to pay back the company’s debts (or a portion of the debts) over a fixed period. If sufficient creditors agree to the CVA, this will mean that the company can continue to operate and trade.
A CVA is usually a good option for businesses that wish to continue trading and have a real chance of recovery as assessed by a licensed Insolvency Practitioner.
In this article Clarke Bell addresses key questions you may have. Such as what is a CVA, how does it work and what are the benefits?
What is a CVA?
A Company Voluntary Arrangement (CVA) is a formal legal insolvency process that allows an insolvent company to:
- Come to a formal arrangement with its creditors over the debt repayment terms
- Typically (but not always) pay back a reduced portion of the total debts
- Create a schedule for the repayments, usually lasting between 3 – 5 years.
A company is only eligible for a CVA if they can prove that they are insolvent, meaning they can’t pay their debts, and have engaged the services of a licensed Insolvency Practitioner who is assured that the business can recover and have a sustainable future.
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How does a CVA work?
There are several steps involved in the CVA process.
The first stage is the proposal.
Having appointed a licensed Insolvency Practitioner (IP), the IP will then draft a written proposal containing the repayment terms and a schedule in liaison with the company’s accountant.
The directors will then get the chance to review the proposal and have the opportunity to raise any questions or queries.
Once the proposal is approved by the directors, the Insolvency Practitioner will then write to creditors, inviting them to vote at a creditors’ meeting which is the next stage of the process.
Here, all creditors will meet and review the proposal. Again, this is their opportunity to raise any queries or concerns over it.
75% of creditors must agree to the CVA proposal for it to be approved.
Whilst this is happening, shareholders will also hold a meeting to review the proposal. Here, 50% must agree for the proposal to be approved.
After both creditors and shareholders have approved the CVA proposal, the Insolvency Practitioner will report on the meetings to present the votes cast to the court.
Now, the CVA is initiated and put into motion.
From this point, the company must stick to the agreed schedule of repayment to the creditors. If the directors stick to the outlined terms, they will be protected from any legal action being carried out against them.
If the director fails to make its agreed payments outlined in the proposal then they will likely end up in compulsory liquidation meaning they will be forced to liquidate and stop trading.
Is CVA right for your business?
A CVA is a good option for directors who want to stay in control and put their business on the path to recovery.
However, there are also other options open to businesses.
- Administration: this is another option that aims to recover and turnaround the business. When a company goes into administration, it’s important to know that no legal action can be taken against it by creditors that are owed money meaning nobody can apply to wind the company up during this time. A licensed Insolvency Practitioner must be appointed to carry out the process and will become the official administrator.
- Creditors’ Voluntary Liquidation: liquidation is a route taken by companies that are not likely to be able to recover. If the Insolvency Practitioner does not consider that your company can be turned around, this is likely to be your best option. There are a few types of liquidation, including Creditors’ Voluntary Liquidation (CVL.) A CVL is a completely voluntary process initiated by the company director(s) and is an option taken by an insolvent company looking to close down. 75% of the company’s shareholders must agree to progress with a CVL. Once processed, the company will liquidate, dissolve and cease to trade.
- Compulsory liquidation: another form of liquidation is compulsory liquidation. This is the most serious form of liquidation which, unlike a CVL, is forced upon a company by creditors who are owed money. These creditors will issue a winding-up petition to the court to retrieve what they are owed. If it is approved, the court will appoint an Insolvency Practitioner to close the company with any funds realised then used to pay back creditors what they are owed or a proportion thereof. Find out more about winding-up petitions and what to do if you are issued one in our handy guide.
Considering a CVA? Get in touch with Clarke Bell
Now you know what a Creditors’ Voluntary Arrangement is and what is involved in the process, you can decide whether this is the right option for your business.
If you do think that a CVA could be the way forward for your company, Clark Bell’s team of CVA specialists are here to help every step of the way.
Alternatively, if you think liquidation is the better way forward for you, our team of insolvency experts are also here to help. With over 25 years of experience, we have helped thousands of businesses with the liquidation process, so you can rest assured you are in safe hands.
We will work closely with your company (and your accountant) to get to know you and your situation to get you on the right track.
To find out more about how we can help you simply get in touch today.