Company Voluntary Arrangements

There is an abundance of information to be found on the internet about company voluntary arrangements (CVA’s), which can often come across as a good idea. You do not need to close and liquidate, you can in fact keep going, keep your bank account and trading name and your creditors can also get something back and not see it all go to waste in a liquidation and closure.

Sometimes if your company has acquired qualifications and licences, you can keep these as well. There is also no need for a report to the Insolvency Service on the directors’ conduct – an issue if the directors have had recent previous insolvencies.

So, why doesn’t everyone do a CVA and keep going when they hit trouble?

The problems with CVA’s

There are several barriers to overcome in order to make a CVA work. Some of the issues are:

You need 75% of creditors by value who vote to approve them.
Creditors can say yes but with difficult or unrealistic modifications e.g. they want the amount they get back to have a significant interest rate.
One creditor over 25% by value can block the CVA or put through some tough modifications. Often this creditor is HM Revenue and Customs. They will make modifications to stop dividends being paid to working directors (pushing up the PAYE cost) or insist on more careful monitoring by the insolvency practitioner who acts as the supervisor.
It can take a few weeks to get the CVA document drafted, agreed and then circulated to creditors. In the meantime, there is no moratorium or protection from creditors to stop them from taking action, which poses a considerable risk.
It can ruin the credit rating of the company and be recorded at Companies House for a long time.
A CVA is usually based on payments by instalments and if you miss 2 or 3 payments it will usually fail, which will then result in liquidation anyway.
If the company has had a fundamental problem (e.g. an expensive property lease), the company will still make losses without a resolution to this issue.
It can trigger the date for employee claims from the government redundancy fund (when the employees are not owed any money) but block the employees claiming in a subsequent liquidation because of the first Company Voluntary Arrangement event.

Often, once the issues above are explained to directors they would rather liquidate, close and buy back the assets or use a pre-pack administration as it can give them more control over the situation.

When does a CVA start to be a sensible choice

We’ve covered some of the negatives of CVA’s, but they do have their benefits too.

Here’s a list of things a CVA will allow a company to do:

1.

It can keep its trading name

2.

It can keep assets in its name that it needs to trade

3.

The company can maintain qualifications that they may need to trade

4.

It can preserve some credibility with suppliers and be seen to be doing the right thing

5.

It can minimise disruption to customers

6.

The Company can keep its bank account

7.

The Company can keep the debtors, stock, and assets due to it

One good use of a CVA is to restructure a chain of retail shops. Normally all suppliers as essential suppliers continue to be paid, apart from landlords. Landlords are then categorised into the type of lease they have and whether to keep a lease on the same terms, push through a rent reduction or break the lease due to the retail site no longer being a viable option.

CVA's step by step process

Step one would be to meet with the directors and consider all of the options. It has to be worth considering the alternatives such as Administration to at the very least rule them out.

If the CVA is the right solution, start to prepare the proposal. This can be a lengthy document setting out the business history, its current financial position and the offer to creditors. Often it also includes a cash flow showing an ability for the company to make monthly payments.

The Insolvency Practitioner then writes a report called a Nominees Report giving an opinion on the merits of the CVA proposal to creditors and whether it is fair to all parties.

The final signed documents are then sent to all shareholders (to have a shareholder meeting to approve the CVA, or not) and to all creditors to approve, or not.

These meetings can be adjourned for up to 14 days.

If the CVA is approved, a report will be filed with all creditors and shareholders as well as at Companies House.

A CVA is not usually as quick as liquidation or administration. Due to there being no protection from creditors within this period, this option will not work for some. Typically, even a quick turnaround can take 4 to 6 weeks to be put together and agreed upon.

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Company Voluntary Arrangements