What is a CVA and What are the Advantages?

February 3, 2021 / CVA

A Company Voluntary Arrangement (CVA) allows an insolvent company to come to an agreement with creditors to repay its debts over a fixed period of time.

Whilst a company is under a Company Voluntary Arrangement, the director remains in control and it will continue to operate and trade. This is an option taken by those looking for business rescue to help turn the insolvent company around.

There are many reasons why an insolvent company would opt for Company Voluntary Arrangement. In this guide, Clarke Bell outlines what a CVA means and what the main benefits of one are, so you can see if this is the best way forward for your struggling business in 2021.

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CVA: Company Voluntary Arrangement: What does it mean?

Before we look at the benefits of a Company Voluntary Arrangement, let’s first look at what it is and what is involved.

A Company Voluntary Arrangement is a voluntary legal insolvency process that allows an insolvent company to come to a formal agreement with creditors to pay back a portion of their debts over time. This usually lasts between 3 – 5 years.

This is the best option for businesses that have a real chance of turn around and recovery, and means they do not have to go into liquidation.

As a legal process, a Company Voluntary Arrangement must be overseen and carried out by a licensed Insolvency Practitioner (IP.) The IP will work with the directors and their accountant and draw up a proposal on how the company will pay creditors back and a schedule under which they will do so. This must be agreed by 75% of creditors and 50% of shareholders to progress.

A company is eligible for a CVA if they meet the following conditions:

  • They are insolvent. This means they can’t afford to pay their debts, cover their daily costs and have liabilities that outweigh their assets.
  • The director and Insolvency Practitioner believe the business has a chance of recovery, can become sustainable once again and rebuild profitability
  • The company can show projected cash flow forecasts that prove they will have enough funds to cover the repayment terms outlined

If your company meets these criteria, a Company Voluntary Arrangement could be the best route forward for you.

Next, let’s look at the advantages of a Company Voluntary Arrangement.

It prevents your company from going into liquidation 

One of the main benefits of a Company Voluntary Arrangement is that prevents your insolvent company from going into liquidation.

By opting for a Company Voluntary Arrangement, you will avoid:

  • Compulsory liquidation: this is where a company is forced to liquidate and dissolve by the court. Creditors who are owed money will issue a winding-up petition to the court and if successful, the court has the power to appoint an Insolvency Practitioner to officially liquidate the company. Just as it sounds, this is the most serious form of liquidation over which a company director has no say.
  • Creditors’ Voluntary Liquidation (CVL): on the other hand, a Creditors’ Voluntary Liquidation is a voluntary process that allows the director of an insolvent company to close and dissolve. This is not as serious as a Compulsory Liquidation as it is initiated by the director themselves. To progress, this requires the approval of 75% of shareholders. For more information on the process of voluntary liquidation, check out our guide for everything you need to know.

So, if you are a company director that wants to continue operating, and you believe you have a real chance of recovery, a Company Voluntary Arrangement can stop your company from going into liquidation and means the company director can stay in control of the business.

It stops legal action being taken against you

Once a CVA has been agreed by all parties and the court, no legal action can be taken against the business.

This should give you peace of mind that creditors cannot issue winding-up petitions to retrieve their money whilst the CVA is in place and gives you some much needed time to work on turning the business around.

It stops repayment demands

As well as stopping the threat of legal action, a CVA also stops repayment demands from parties that are owed money, whether that is creditors or HMRC.

After all, constant repayment demands can be stressful and draining to directors, especially if multiple creditors are trying to retrieve what they are owed.

A CVA must be accepted by creditors, and once it has been approved they are prevented from taking action so long as the terms of the proposal are stuck to.

CVA’s are more private

Other insolvency processes, such as Compulsory Liquidation, are public processes and must be advertised in The Gazette.

However, with a CVA there is no requirement for a business to tell their customers or the public about the process – although their credit rating will be affected, so it may flag up with new suppliers / customers which could cause an issue when re-negotiating current contracts.

A CVA can be a private matter which is great for directors that want to turn the company around and keep their reputation intact.

There will be no investigation into the directors’ conduct

Similarly, with insolvency procedures such as Compulsory Liquidation, an Insolvency Practitioner is required to investigate the directors’ conduct leading up to insolvency. This is a legal requirement and occurs in every case.

However, with a Company Voluntary Arrangement, Insolvency Practitioners are not required to investigate the directors’ conduct. (If the company goes from a CVA into CVL or Administration, then an investigation will be conducted by the IP). This means the director can instead focus on turning the company around.

A CVA could be cheaper than other insolvencies

The cost of a CVA is determined on a case-by-case basis, and is often a cheaper option than other forms of insolvencies. When you speak to an Insolvency Practitioner, they will be able to outline the costs involved in the options available to you.

Think a Company Voluntary Arrangement is the best option for your insolvent company?

If you have come to the conclusion that a Company Voluntary Arrangement is the best way forward for your struggling business, it is important to act quickly. After all, the sooner you act, the more options remain open to you and the less likely things will get worse.

If you are considering a CVA, get in touch with Clarke Bell today. Our team of expert CVA specialists are on hand to give professional insolvency advice and find practical solutions to help you.