A Company Voluntary Arrangement (CVA), what is it? It is a legally binding agreement between a company and its creditors or stakeholders. This agreement allows you to pay your creditors or stakeholders more, hence cutting down on the total amount being owed. Thus it is a way for a company to limit or avoid insolvency.
Why do we have CVAs?
CVAs have become widely used in recent years. As of March 2016, there were 6,566 Company Voluntary Arrangements (CVAs) set up in the UK, up from 4,193 in 2011. As more companies grow and struggle to stay afloat and the growing trend of downsizing and group mergers, it is inevitable that we will see more CVAs in the future.
What is a Company Voluntary Arrangement?
A Company Voluntary Arrangement (CVA) is an agreement between a company and its creditors or stakeholders, also known as a restructure. This agreement allows you to pay your creditors or stakeholders more, hence cutting down on the total amount being owed. Thus it is a way for a company to limit or avoid insolvency.
How does a CVA work?
The terms of a CVA are set out in the creditor’s petition. Within this petition is a list of assets and liabilities, the suggested amount to be paid to creditors and which creditors are proposed to be protected. The directors of the company are responsible for preparing the petition. The petition needs to be presented to creditors, who decide whether they want to vote in favour of the CVA.
If all creditors vote in favour of the CVA, then it goes before an adjudicator, whose role is to decide on the amount to be paid to creditors and to what extent they will be protected. The judge will only make a decision on a creditor’s proposal if one of the creditor’s representatives, or their appointee, can prove that the proposal has merit.
What happens if they don’t vote for the CVA?
If the proposed creditors or stakeholder’s vote is against the CVA, then the CVA is not approved and creditors must accept the default position. A creditor’s vote generally has to comply with the requirements in section 318(1)(b) of the Insolvency Act 1986.
However, in some circumstances, a creditor may be denied the right to vote based on their position or status. For example, if a company is insolvent, the liquidator will not be able to vote in favour of the CVA. In addition, some trustees of insolvent trusts cannot vote unless the creditor is owed money.
Who can be involved in a CVA?
Any creditor or stakeholder can be a part of a CVA, such as a debenture holder, employee, trade creditor, HMRC (the tax man), an individual or a company.
What happens if a CVA fails?
The directors may have to act quickly, as there is a time limit on using a CVA (42 days). If a company’s creditors reject it, the directors are in breach of their statutory duties and the directors may be disqualified from acting as a director of a company.
Why do CVAs fail?
There are a number of reasons as to why CVAs fail.
The offer is not deemed fair by creditors
In some cases, the creditors do not feel the offer is fair or do not understand why it is being offered to them.
The directors did not act on creditors’ wishes
Just because a CVA is proposed and creditors vote in favour of it does not mean that it will be implemented. If the directors have failed to act on the proposals submitted, then the CVA may end up being rejected.
CVAs are not allowed
In certain circumstances, companies may not be able to use CVAs. For instance, if a company is insolvent, then the CVA proposal will not be accepted. In addition, a company that is unable to pay its debts as they are due may also be prevented from using a CVA.
What are the benefits of a CVA?
There are many benefits to implementing a CVA, which include:
It is legally binding
Once the CVA has been approved by the creditors, it becomes legally binding. This means that the company cannot be forced into liquidation by its creditors.
Payments can be spread over a period of time
A CVA allows the company to spread its payments over a period of time, which can make it easier for the company to make the payments.
It can help the company avoid insolvency
If a CVA is successful, it can help the company avoid insolvency.
It can help improve cash flow
By making smaller payments over a period of time, it can help improve the company’s cash flow and return the business to a stable position.
If your business is experiencing cash-flow problems or related financial pressures, speak to the Springfields team today to explore options for your business by calling 0116 299 4745 or email info@springfields-uk.com
