These are the ten most important things you as a business owner need to know about Company Voluntary Arrangements (CVAs):
- A CVA is a legally binding agreement between a company and its creditors to repay a portion of its debt over a set period of time.
- CVAs are typically used as an alternative to liquidation, which would see the assets sold and often the business closed down.
- To propose a CVA, a company must appoint a licensed insolvency practitioner to act as its ‘Nominee’ to put a Proposal to the creditors and members and as ‘Supervisor’ to oversee the CVA, receive monies into and pay out to creditors.
- A CVA proposal must be approved by above 75% of the company’s creditors by value, and 51% of its shareholders, who must vote in favour of the proposal.
- Once a CVA is approved, it binds all of the company’s creditors and shareholders, even those who did not vote or voted against it.
- A CVA can be a useful tool for restructuring a viable company’s debt and allowing it to continue trading. It is not a tool to be used by an unviable company or a company whose business is currently unviable and cannot be made viable through significant change.
- A CVA can help a company to negotiate more favourable terms with its creditors and reduce its overall debt burden.
- Most CVAs are medium term agreements of 3 to 5 years duration with the company paying most or all of its profits into the CVA pot during that time. There is another option, of a short ‘one-off’ CVA where an investor agrees to pay an agreed sum into the CVA pot and an additional sum into the company to improve its cash flows in return for the creditors’ agreement to write off some of their debts. The former have a high failure rate – more fail than succeed – the latter are far more successful.
- A CVA, while less public than administration and liquidation, still goes onto the public record and this can affect its credit record and its ability to obtain credit in the future. A cash injection is almost always required to manage the company through its inevitable cash hole, merely putting a company into CVA never resolves all of its financial difficulties.
- CVAs are not suitable for all companies, and other options such as administration and liquidation should be considered before choosing a CVA.
If you would like to explore the option of CVA with me, give me a call.