What is a CVA – Definition
CVA stands for Company Voluntary Arrangement. When a company enters into a CVA it reaches an agreement with its creditors to pay those creditors over a period of time rather than dealing with the financial difficulties of the company in a different way such as Liquidation or Administration.
A CVA is a tailored plan to pay to creditors what the Company can afford over a realistic timetable. The CVA may therefore repay to creditors 100 pence in the pound or as little as 20 or 30 pence in the pound and may operate for a relatively short period – say one year, or a longer period – say five years. It all depends on the circumstances of the Company.
What is a CVA – How it Works
Creditors will usually agree to a CVA providing it has been properly constructed and well thought out which is where the Insolvency Practitioner dealing with such a process is so important. (Griffin & King are experts and can assist with this). The alternative to a CVA for creditors would be Liquidation or Administration which would usually mean that the creditors would receive no divided whatsoever in respect of their debt.
Under a CVA proposal a dividend (or partial return of debt) would be made to creditors. There would be a formal creditors meeting called by the Insolvency Practitioner whereby the creditors get a formal opportunity to vote on the proposals put forward by the company.
It will be necessary for the Insolvency Practitioner (Tim Corfield) to either prepare or assist the Directors with budgets and cashflows to demonstrate that there is a core profitable business that can continue to trade and deliver the terms of the CVA.
At the meeting of creditors at least 75% of the creditors voting in person or proxy must agree the terms of the CVA for it to become legally binding on all of the unsecured creditors. Any minority creditor that voted against the proposals would be bound under the terms of the CVA.
The whole principal of the CVA is that the business is rescued and continues to trade and there is a return to creditors of at least some of their debt.
The Benefits – of a CVA
- Creditors can take no further legal action
- A business may be able to recover from a difficult financial position
- Creditors generally agree to a CVA therefore a business going forward
- The agreement is legally binding
- Payments are structured and affordable
- It avoids Liquidation or Administration which means that the company can continue to operate and generate a profit
- It is a more cost effective option than other Insolvency procedures
- There is no investigation into the Directors conduct
How to Start a CVA
The Directors of the company would usually commence the CVA process. It would be necessary to contact an Insolvency Practitioner (Tim Corfield 01922 722205) who would assess the financial position of the company and work with the Directors to put forward a plan to be put to the creditors at a formal creditors meeting.
A formal report (called a Proposal) which would contain all the details of the business plan would be forwarded to the creditors once it has been agreed with the Directors. At the meeting of creditors the creditors get the opportunity to put forward modifications to the plan which have to be agreed by the company. In practice the Insolvency Practitioner will negotiate on behalf of the company and will liaise between the company and the creditors.
What happens if the creditors are pressing?
If creditors are threatening bailiff action or a winding up order it would be possible to obtain court protection through a moratorium. The effect of this is to freeze any action against the company. During the moratorium period the insolvency practitioner will carefully monitor the trading position of the company.