Company Voluntary Arrangement (CVA)
A Company Voluntary Arrangement, or CVA, is a formal, legally binding agreement between a Limited Company and its creditors and forms part of the 1986 Insolvency Act.
CVA Or IVA?
Firstly, a CVA is not to be confused with an IVA.
- A CVA assists Limited Companies.
- An IVA assists individual Sole Traders.
What Is A CVA
A CVA provides a Limited Company that's experiencing cash flow problems an opportunity to reach a formal arrangement with its unsecured creditors.
Based on a predetermined fixed term of up to 5 years, a new proposed agreement is put before the Company's creditors at a Creditors' Meeting.
The CVA proposal lays out the Company's assets, liabilities and cash flow projections as well as any information relevant to the circumstances surrounding the Company's financial difficulties.
The Company's creditors are asked to accept the repayment schedule laid out within the proposal, as an alternative to forcing the Company into liquidation.
The CVA proposal will detail how the Company intends to continue trading whilst it repay its liabilities, either in part or in full, over a fixed period of time tailored to suit the circumstances of the case.
To become accepted and, therefore, legally binding, the CVA requires approval from 75% of the voting creditors (in debt value terms), based on votes being cast at the Creditors' Meeting.
Once accepted, the CVA becomes binding on all creditors that are sent notice of the meeting, regardless of how they voted at the meeting. Even those that initially rejected the CVA proposal will be legally bound by its terms if the required majority voted to accept.
This includes 'crown monies' owed to HMRC, such as unpaid VAT and Inland Revenue bills, removing their right to take legal action against the Company whilst it adheres to the CVA.
Is entering a CVA the right decision
Deciding on whether a Company Voluntary Arrangement (CVA) is the right solution to help your limited company trade through a tough financial climate is a difficult decision.
This article will help you focus on the benefits that a CVA can provide. CVA is it the right decision.
Why would creditors accept?
The CVA must represent a better alternative to creditors than liquidating the Company and, if it can be demonstrated that the CVA provides a stronger financial return, it will normally be the more favourable option to creditors.
Therefore it's really important for the directors to communicate their desire to protect creditors' interests in the Company by showing a willingness to repay as much debt as possible under the CVA.
Role of the Insolvency Practitioner
A CVA can only be set up and administered by a licensed Insolvency Practitioner (IP) who acts, initially, as nominee and then, later, as supervisor of the CVA.
It is the IP that prepares the CVA proposal, chairs the Creditors' Meeting and administers the CVA for the duration of the fixed term, ensuring all parties adhere to the agreement.
CVAs deal only with unsecured debt
Companies considering entering a CVA should bear in mind that a CVA only has the power to deal with a Limited Company's unsecured creditors and has no power to write off any secured debts.
This means the Company still remains liable for its secured debts throughout the full duration of the CVA and it must maintain repayments towards any secured loan agreements it may have throughout the full term of the CVA.
If any of the Company's directors have given a personal guarantee (PG) to a creditor, their liability to the Company's debt will not be removed through the implementation of a CVA.
Instead, they will be required to make arrangements with the creditor in order to honour their personal liability to the Company's debt.
However, this could involve entering into an IVA, providing the right way forward for handling the liability to the PG.
Conclusion of the CVA
Once the CVA's fixed term has been completed successfully, a completion certificate is issued by the IP and any unsecured debts not repaid in full by the CVA are legally written off.
The Limited Company has now fulfilled its legally binding agreement and is free to move forward, completely free of its unsecured liabilities.
Cash flow problems
If the Company experiences cash flow issues whilst in the CVA, it's not always insurmountable.
If the Company remains viable, it's possible to request another Creditors' Meeting, a Variation Meeting, to discus changes to the orignal agreement.
If sufficient percentage of creditors agree to the variation put before them, the amended CVA will become legally binding on all.
Professional Opinion
For any further information on CVAs, call IVA.info for free on 0800 088 7502 anytime or, if you prefer, complete this form and one of our advisers will call you back.
