Company Voluntary Arrangements
P&A’s CVA specialists have extensive knowledge and expertise in Company Voluntary Arrangements. A CVA can offer support to insolvent companies by safeguarding the survival of your business.
A Company Voluntary Arrangement (CVA) can provide a lifeline to insolvent companies with a mechanism to freeze and potentially reduce a company’s liabilities.
What is a Company Voluntary Arrangement? (CVA)
A CVA - Company Voluntary Arrangement– is a formal agreement with creditors to pay back debts over an agreed period of time. Creditors often agree to just a percentage of their debt being repaid on the basis that they retain their customer and they decide it is better to be paid something than nothing at all.
A licensed Insolvency Practitioner has to oversee the process and it has to be approved by 75% of unsecured creditors by value. The advantage to management is that they remain in control of the company with the intention of returning value to its shareholders.
How does a CVA work?
If a company is in financial difficulties, i.e. trading at a loss and insolvent, directors typically ask their accountant for advice. Accountants normally refer their client to a licensed Insolvency Practitioner such as P&A. If the company is profitable and viable, except for immediate cash flow pressures, the licensed Insolvency Practitioner may recommend a CVA.
Cash flow and profit and loss forecasts are prepared for the company on the basis that no further payments are made to unsecured creditors, including HMRC. These forecasts demonstrate how much money can be set aside each month from trading profits to create a fund to pay the company’s creditors. A CVA will typically last for 60 months. For example, if a company can set aside £1,000 a month - £60,000 for 60 months – and creditors are owed £100,000, after costs of say £15,000, trade creditors will receive £45,000 in full and final settlement of their debts. This means that each creditor is paid back 45p for every £1 they are owed. Any value in the company after 60 months is available for the company’s shareholders.
Before recommending a CVA to directors, the licensed Insolvency Practitioner (IP) estimates what creditors might receive if the company went into liquidation and its assets sold. If the IP believes there is a distinct advantage to creditors to support a CVA, rather than liquidation, they work with the directors to prepare a formal document (called Proposals) which is sent out to creditors.
The IP includes their report in the Proposals (called a Nominee’s Report), setting out why they believe the CVA should be considered by creditors. The Proposals and Nominee’s Report are issued to creditors together with a notice convening a meeting of creditors and shareholders after at least 14 days.
A creditors’ meeting is held to consider the Proposals and, if approved by 75% by value of those creditors who choose to vote, the CVA is implemented.
If shareholders also approve the CVA, the IP becomes the Supervisor. They then collect the monthly contributions and ensure the Proposals are properly implemented.
Directors continue to manage the business without the interference of the Supervisor as long as the promised payments and terms agreed are delivered.
The Supervisor pays out contributions on a regular basis to creditors. Once the CVA is completed (say 60 months) the CVA is concluded and the company carries on as normal.
A CVA is not suitable for every company because there is a high failure rate when the original problems that caused the difficulties are not addressed. It can also be difficult to get credit from suppliers whose debts are frozen. However, as customer payments are not used to pay the old debts, they do provide working capital for pro forma payment to suppliers.
For individuals, an individual voluntary arrangement (IVA) means an individual in financial difficulty can avoid personal bankruptcy.
“Our bank was keen to use a ‘big six’ firm for the second time - luckily we were introduced to you by our accountants. With creditor support we entered into a voluntary arrangement, enabling us to keep our workforce and settle creditors as agreed in the arrangement. We firmly believe that without your intervention, liquidation would have resulted.” Building contractor, Lincolnshire
“We are a small ‘one product’ company that suffered a major bad debt that nearly pushed us into liquidation. Your negotiations on our behalf with our major suppliers enabled us to keep trading - and two years on we are back in profit and with a positive cash flow.” Engineering company, South Yorkshire