What are company voluntary arrangements (CVAs) and how do they work? Licensed Insolvency Practitioner, Wayne Harrison of KSA Group, outlines all you need to know about the formal insolvency mechanism.

What is a company voluntary arrangement (CVA)?

A company voluntary arrangement (CVA) is a legally binding agreement an insolvent (or contingently insolvent) company makes with its unsecured creditors, allowing a certain amount of its debts to be paid back over time, usually a period of 3 to 5 years.

Put simply, it is the arrangement of a debt re-payment plan over time with creditors. Debts are paid back from future profits or from proceeds made when disposing of assets.

When and how does a CVA come into force?

CVAs can be proposed by the directors of the company, or the administrator if the company is already in administration.

Before launching a CVA proposal, it is recommended to have the following components for best chances of success:

• a viable business that looks as if it can return to profitability in the future
• a commercially structured deal to be proposed, so that you are not paying too much too soon
• appropriate levels of working capital to complement the restructuring of debt
• a management team who accept change in the company and its structure is needed
• determination and hard work
• CVA advisors must be on board to assist directors
• cautious forecasts

Directors appoint advisors to assist with the construction of a CVA proposal, including detailed reviews of the company. A CVA takes some time to be launched because of the hefty review and drafting processes involved - directors and advisors must ensure the proposal acts in the best interests of creditors.

The CVA comes in to force after two votes:

1. First, once 75 per cent of the creditors’ support (by value) is gained by form of a vote on the proposal.
2. A second vote, not including connected creditors, is taken and provided that not more than 50 per cent of unsecured creditors vote against the proposal, it is approved.

The voting process takes around 2 to 3 weeks, and can be done virtually, or physically, if requested. As soon as it been approved, all unsecured creditors are bound by the arrangement.

The deal creates a ‘moratorium’ around the company, stopping any creditors attacking the firm by legal action or demanding payment on the debts bound into the CVA.

What are the advantages of a CVA?

The advantages of a CVA include:

• the company can continue trading whilst under a CVA
• the appointed supervisor has the role of monitoring the process, so the board and shareholders keep control
• creditors are guaranteed to receive some payment of their debt over time and retain a customer
• pressure from tax, VAT, PAYE and threat of a winding up petition is stopped during this process due to the moratorium placed
• you don't have to publicise that your company is undergoing the process, as it does not need a public announcement such as when in administration
• it allows your company to terminate employment, payment/compliance obligations under leases and inconvenient supply contracts with little to no cost involved

What are the disadvantages of a CVA?

The disadvantages of a CVA include:

• the arrangement lasts for 3 to 5 years
• only unsecured creditors are bound by the arrangement, not those secured; this means secured creditors keep the ability to call in administrators if they are not happy with the way their debts are being serviced
• for a CVA to go ahead you need 75 per cent of creditors (by value) to agree; this can be hard due to the differing views of creditors (landlords tend not to be as keen as HMRC, for example)
• the company earns a zero-credit rating which may make it difficult to attract new suppliers or gain new contracts
• it takes time for proposals to be put together and then put forward - three weeks as a minimum but on average, realistic time frame looks more towards 7 to 10 weeks, having all the required information available from the outset

How much does a CVA cost?

The cost of a CVA is variable, depending on the complexity of the case. Things which will affect the cost include:

• the total number of creditors
• the total number of employees
• the bank’s position
• the level of negotiation needed

But compared to other insolvency mechanisms, a CVA is generally less expensive. You should always discuss with a turnaround practitioner about this query, as they can give you a more accurate cost plan, one usually spreading the cost of their work to match the struggling firms cash flow ability.

What happens if a CVA fails?

As a director

If your company enters a CVA and you cannot keep up with the payments, this means that the CVA fails, has stopped and leads to liquidation. It is possible to try and call another creditors meeting to see if they will accept new terms. If the proportion in the pound is high - say more than 50p in the £1 - then it stands a good chance.

It is also worth mentioning that if this is the case, you do not become personally liable for the debts as it is a company voluntary arrangement. Though of course, if you have personally guaranteed any debts, then it becomes a different story, but this would happen whether the CVA ‘failed’ or not.

If you are struggling to keep up with the agreed payments, then the appointed supervisor will work with you to assess what modifications can be made to the arrangement. For example, you might be able to extend the period the CVA runs from 3 to 5 years to 5 to 7 years or a smaller dividend. This would involve another creditors meeting and a vote on the amended proposal.

If no modification is appropriate, or is unlikely to be accepted, then it would be to the supervisor’s discretion as to if they would file a petition to wind the company up.

As a creditor

Being a creditor involved in a CVA, liabilities cannot be increased. If you are not being paid or have a build-up of debt, then you must contact the supervisor of the CVA immediately. If new debt is occurring, you have rights to take the legal action necessary to recover it, being that the new debt is not bound by the CVA.

About the author

Wayne Harrison is a licensed insolvency practitioner who has over 25 year's insolvency experience helping companies in all sectors. Wayne is the director in charge of the London Office of KSA Group. Prior to him joining KSA Group in 2009 he was appointed by the IPA to oversee the regulation of insolvency practitioners. Wayne is a contributor to Company Rescue.

See also

All insolvency notices

A guide to members' voluntary liquidation (MVL)

What you need to know about Corporate Insolvency and Governance Bill

Image: Getty Images

Publication date: 2 July 2020

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.