Company Voluntary Arrangement (CVA)
A CVA is primarily used to rescue a company in financial difficulty while avoiding Insolvency proceedings and a cessation of trading. A CVA will release a company from all unsecured debts.
When is a CVA appropriate?
If a company is unable to pay its debts in full, then it can propose a CVA to its unsecured creditors.
Typically, entering into a CVA will be appropriate for companies that have:
- suffered cash flow problems and are under creditor pressure, but it is anticipated that profits will increase in future or that a major contract will be secured
- been profitable, but have had short term financial problems due to bad debts
- a need to restructure but lack the necessary funds to do so. A CVA may be part of a wider restructuring policy
- become unprofitable, but a CVA would provide a better return to creditors than alternative Insolvency proceedings.
What does a CVA involve?
A CVA is an agreement for the company to pay a sum of money into a single arrangement for the benefit of unsecured creditors (those who do not hold security over any assets). This could result in up to 75% of these debts being written off by the creditors.
A proposed course of action will be drafted and put to the creditors to vote on. A typical CVA proposal might include an offer to make a monthly payment from the company’s profits. If 75% (in terms of value) of unsecured creditors agree to the CVA then all of the creditors, including those who are voting against the proposal, are bound by the arrangement.
Once a CVA has been approved, no unsecured creditor can take any further action to recover their money, outside of what has been agreed in the CVA. It is also possible to obtain protection against enforcement action by creditors while the proposal is being prepared.
A regulated, licensed Insolvency Practitioner (IP) must agree that the CVA is fair to both the company proposing the CVA and its creditors. The IP will be responsible for ensuring that the CVA is implemented properly
Benefits
In a CVA the directors retain control of the company, and for small owner managed, or family companies this may be a significant factor.
A further benefit is the protection a CVA affords to the reputation of the company. Unlike other Insolvency proceedings, as there is no requirement to advertise that the company is in a CVA, either on letterheads or in newspapers.
For a detailed analysis of the company’s financial affairs and more advice, please call Ted Wetton on 01226 215999. Alternatively, ask the company’s professional advisors to contact us.
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