In this article, we answer the question: what is a company voluntary agreement?
CVAs are formal deals set between a business that is insolvent and its lenders (creditors), usually over a period of 3 to 5 years. These arrangement types are enshrined in law and form part of the Insolvency Act of 1986. Unlike liquidation or administration, the details of the business that goes into a CVA is not announced publicly in The Gazette, but it is found at Companies House.
The CVA mechanism is designed to assist businesses that run into financial problems (financial distress), that are facing cashflow problems, are behind on their tax payments, or those facing court or legal action. To ease the pressures, debt repayment plans are set up to make sure the creditors are still receiving some money back over the course of 3 to 5 years. In most cases, when a business is in liquidation or administration, creditors expect minimal recovery when it comes to the debt.
With a CVA, the debt may be settled from profits in the future over a timeframe that is set, allowing the company to carry on trading. A percentage of the companies debt should also be wiped clean (written off). A CVA provides companies with a way to re-evaluate or restructure the business, along with creating better business strategies and better structures. At the same time, the directors of the company retain control over the business.
Avoiding publicity is usually always beneficial for companies since they get to save their reputation without resulting in unnecessary worries to creditors. It is suggested, however, that trade suppliers and creditors are made aware before the company enters a CVA, to guarantee continued work and to promote a trustworthy relationship.
Benefits Of A CVA
– Stops legal actions and winding-up petitions
– Stops the pressure from tax payments, PAYE, and VAT
– Ends lease liabilities
– Terminates supply contracts and terminates employment (at no cost)
– Directors are allowed to carry on running the company, and no administrator will be brought in
– Creditors recognize better returns
– The costs are lower when compared to administration
– It won’t be publicly advertised
Drawbacks Of A CVA
– The credit rating of the company is set back to zero, so it can become harder to carry on with current lenders and suppliers
– The business has to commit to monthly payments over at least 3 years, without missing a payment
– CVA proposals take time to put together, so when serious legal action becomes a threat, administration might become necessary to provide the company with protection before a CVA is approved
– By value 75% of the creditors that vote have to agree on the CVA
– CVAs only bind unsecured creditors, which means a secured creditor can still withdraw funding or appoint administrators
The Process Of A CVA
Here is a brief guide on how a CVA works:
– An insolvency practitioner or turnaround practitioner is first appointed and advisors. These professionals will work with the directors to formulate a CVA proposal. The proposal has to be feasible, fair, and fit, and must include financial forecasts in detail.
– During this timeframe, the company will be allowed to operate as normal.
– The draft needs to be presented to secured creditors, while showing them how the CVA is going to maximise the interests of the creditors. Every party has to agree on the way the debt is going to be paid back.
– From here the CVA proposal is filed with a court. It is then printed out and sent to every creditor.
– From here the creditors have at least 17 days to assess the CVA before holding a meeting.
– At this meeting, the creditors vote (which could also be done by proxy). 75% of the creditors have to vote the CVA in favor before it will be approved.
– The CVA supervisor will then collect payments every month and then distribute the money to the creditors, which is usually done annually.
CVAs are rescue solutions that may be a viable option for businesses that face financial hardships. With hard work, determination, and the assistance of an expert CVA advisor, the business can turn around and return to making profits.