Businesses in trouble have a number of options that may be available or may be forced upon them, however, there is a considerable amount of confusion around the differences between them. In this post, we’ll explain Company Voluntary Arrangements. If you decide you need a CVA then are there to help.

A firm that has a large amount of debt and is constantly facing chasing activity and threatened legal action may choose to look towards a CVA. In a CVA the debts are collected into a pool and the company is then given time to pay these off.

The first test is that the company must be insolvent, either in actuality or due to contingent liabilities (Liabilities that haven’t happened but have a good likelihood of crystallising in the future) to apply for a CVA.

The primary aim of a CVA is a company restructure and rescue, with the value being returned to the creditors. The focus is on producing a realistic and achievable plan to allow jobs to be retained and to return the company to good health and it has to be said that the government has become much more keen to encourage a ‘rescue culture’ since the downturn in the economy, recognising that potentially profitable businesses can be saved.

The central feature of a CVA is the business plan. To achieve an agreement the business must produce a realistic business plan and cash flow forecast for the life of the CVA which shows that the company is viable and that it will generate enough cash to pay back those that it owes.

Throughout the CVA the directors remain in charge however at the start of the process they can apply to the court for a moratorium which ensures that it cannot be subject to legal action due to unpaid debts from its creditors. This gives the management of the company time to produce its plan.

Clearly, this is not a totally straightforward process and normally a company will appoint an experienced advisor to see them through this difficult time. The advisor will look at the situation surrounding the company and ensure that no other debts are run up in the meantime.

The company can then apply for the moratorium and the advisor will usually inform HMRC that the firm is taking this action, relieving any pressure for unpaid PAYE, NICs and corporation tax.

The forward forecasts and business plan will then be completed, usually for a period of around 3-5 years and once a draft document is produced this will often be presented to secured creditors to obtain their outline agreement.

Once an informal agreement has been obtained the proposal will need to be filed in court and a printed copy distributed to all creditors.

The company will then need to arrange a creditors meeting at an independent, but local venue at which the proposal can be discussed and voted upon. Generally speaking, this will be chaired by the advisor and will be attended by professionals representing the major creditors.

The CVA must be agreed by a 75% majority by value of the creditors. The creditors do not need to attend, and this is where a good pre-meeting strategy can see enough proxies lined up to ensure a proposal passes. A good viable and realistic plan will usually win the agreement of the largest creditors as they will see that this is the best way of gaining value.

Once agreed the debt is then ‘frozen’ into the agreement and this is where the work begins in earnest. The company is legally bound by the terms of the agreement and must make the repayments as and when they are required. Failure to make the payments will result in a default and nullification of the agreement, usually leading to liquidation.

At the end of the agreement the supervisor will issue a completion certificate and any unsecured debt that existed at the start of the agreement will be written off. The restructured and healthy firm will then exit the CVA state and the Directors can also look to get any personal guarantees removed.

A CVA is a pragmatic solution to a company getting into difficulties and helps to avoid liquidation of the attendant costs and loss of jobs. IT can be the better solution for employees, directors and creditors of distressed firms and companies should speak with a qualified advisor to see if it the right option for their situation.

What are the Consequences of a Company’s Insolvency?

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