A Company Voluntary Arrangement (CVA) is a way for a company in trouble and heading for insolvency to avoid liquidation. One of the biggest headaches for companies in the above position is repayment of credit, particularly where ability to make repayments is affected by poor cash flow owing to customers failing to pay bills on time. In 1986 CVAs were introduced into UK law as an alternative to liquidation. In essence they work in the same way as Individual Voluntary Arrangements that people who are insolvent with outstanding debts can arrange. A CVA enables a company to reschedule some or all of its corporate debts,
usually over a period of between 3 and 5 years, through voluntary agreement with it's creditors. At the end of the CVA period any outstanding debt is written off. A CVA is legally binding, and they are
often favoured by most major creditors, including Her Majesty’s Revenue and Customs (HMRC). They can only be arranged through a Licensed Insolvency Practitioner.
Who can apply for a CVA?
The following people can apply for a CVA on behalf of a company in trouble:
- Administrators (if company in Administration);
- Liquidators (if company in liquidation).
A CVA can be seen as a preferable alternative to liquidation by directors who:
- Do not want their suppliers to lose money;
- Know the company is experiencing temporary problems affecting it's short-term financial health but has every prospect of recovering;
- Can show the company’s business model is sound and it's order book is full but it is being held back by short-term cash flow;
- Are aware that in order for it to be successful the company needs to be restructured; and
- Have tried but failed to informally negotiate with creditors.
The behaviour of directors
Company directors must always act responsibly to protect shareholders and creditors. As soon as there are clear signs that a company is in trouble directors must act; usually the first step is to discuss options with an Insolvency Practitioner. Ignoring the situation, taking out additional credit and continuing to trade leaves the
directors open to charges of wrongful or fraudulent trading which carry serious risks, including:
- Directors having to contribute personally to the assets of a company in liquidation;
- Disqualification from acting as a director of any other company for between 2 and 15 years;
- A term of imprisonment.
Under a CVA directors have no personal liability for the debts of the company unless they have given personal guarantees. Even in those circumstances a director would only have to make repayment if the company failed to do so and, as a CVA enables the company to remain in business, that
would hopefully not arise. Also, unlike liquidation, setting up a CVA does not require investigation of the behaviour of directors.
Setting up a CVA
Following a meeting with the Board of Directors to establish the situation, the Insolvency Practitioner will draft a proposal for creditors. It is important that a company is not over ambitious in what it offers in the hope of winning the support of creditors for the CVA. An experienced Insolvency Practitioner will guard against this in the knowledge that such an arrangement is likely to place too much pressure on the company and consequently cause the CVA to fail.
First creditors' meeting vote
The draft proposal drawn up by the Insolvency Practitioner will be shared with creditors who are given 14 days notice of a creditors' meeting. At the meeting the proposal is formally put before creditors and they are asked to vote on it. Creditors do not have to attend the meeting and can vote by proxy. For the proposal to stand 75% of the creditors (by debt value) must vote to accept it. If this happens other creditors who voted against it or failed to vote are bound by its terms.
Second creditors' meeting vote
A second vote is held excluding connected creditors (directors or employees who have provided unsecured finance to the company)
or their associates. This is to prevent connected creditors ensuring the CVA is approved. At the second
count the CVA proposal must be accepted by 50% of unconnected voting creditors.
CVA in place
Once the CVA is in place the company will make the agreed monthly payment to the Insolvency Practitioner who, after deducting their own administrative charges, will divide the remaining sum between creditors on a pro-rate basis.
Advantages of a CVA
A CVA carries many advantages, including:
- Stopping any legal action by creditors for the recovery of debt, including County Court Judgement applications and winding-up actions;
- Preventing HMRC putting pressure on the company for payment of PAYE and VAT debts;
- Improving cash flow quickly by reducing the amount spent on debt repayment;
- Enabling the company to terminate leases and employment contracts, including those of managers, directors and employees not entitled to redundancy pay;
- The continuation of trading with the consequence that most employees keep their job;
- The Board and shareholders remain in charge;
- The costs of the Nominee and Supervisor are often lower than those charged for entering into Administration;
- CVAs are not advertised publicly;
- The company retains many of its creditors as customers who get at least some of their money back even if it is over a longer period than the original repayment term; and
- No further interest or administrative charges for historic debt
Disadvantages of CVAs
The following disadvantages are associated with setting up a CVA.
- Some creditors may take a negative view of shareholders and the Board remaining in control of the company;
- The company may have a zero credit rating and as a consequence will have to renew some contracts and be able
only to operate on a cash-on-delivery basis for others;
- A CVA does not include secured creditors;
- 75% of creditors by value must agree the proposal;
- A CVA is a legal vehicle and whilst some flexibility can be built in they are quite rigid;
- CVAs are registered with Companies’ House and this can affect both a company’s future potential to borrow and influence, negatively, those parties who may otherwise have done business with the company.
Mitigating the disadvantages
There are things a company can to do mitigate the above disadvantages.
1. Directors must make sure that they change the way that business is conducted, that company practices are overhauled, there is greater efficiency and sales are increased. This should avoid the circumstances leading to the CVA happening again. Directors should make sure the CVA is maintained as the result of failure is likely to be liquidation of the company.
2. Remain on good relations with secured creditors and maintain payments to them. Even when a CVA is in place secured creditors can call in the administrator at any time. In some cases, where a secured creditor is problematic, the Insolvency Practitioner can arrange for a new party to take over and finance the debt.
3. Maintaining good communication with all creditors will help secure the 75% needed. Many large creditors, including HMRC, respond well to proposals from a company to set up a CVA. Other creditors such as landlords, particularly where the CVA can lead to leases being terminated, can be more difficult. However a sensible and fair proposal containing a repayment schedule the company will be able to adhere to has every chance of success.