What is a CVA in Business: Exploring Company Voluntary Arrangements

A Company Voluntary Arrangement (CVA) under Part 1 of the Insolvency Act 1986 is an essential tool for businesses threatening insolvency, allowing them to formulate a plan to repay debts and restructure operations. This process involves a detailed investigation by licensed insolvency practitioners authorised by professional regulatory bodies, giving the company the best chance for a turnaround under English law whilst ensuring compliance with statutory requirements.

In many instances, lenders and creditors favour CVAs as a better alternative to liquidation under the regulatory framework. The company must secure at least the minimum required creditor approval of 75% by value to proceed under the statutory requirements established by the Insolvency Service.

Understanding what happens after a company voluntary arrangement under English law is important for managing expectations whilst ensuring compliance with regulatory requirements. Essentially, a CVA helps companies avoid formal insolvency procedures whilst staying in control under the statutory framework, but its success depends on careful planning and cooperation with stakeholders whilst ensuring compliance with professional oversight.

What is a Company Voluntary Arrangement?

A Company Voluntary Arrangement (CVA) under Part 1 of the Insolvency Act 1986 is a vital financial tool that allows businesses in distress to restructure their debts whilst continuing to trade under English law. This legally binding agreement between a company and its creditors under the regulatory framework is designed to provide convenience and flexibility by easing immediate financial pressure whilst ensuring compliance with professional regulatory bodies including ICAEW, ACCA, and IPA.

Once advertised in The Gazette and proposed under the statutory framework, the CVA must be passed by a requisite majority of creditors representing 75% by value under the Insolvency Act 1986. If approved under English law, it allows the company to remain in control of its operations, offering a chance to recover whilst retaining its customers, services, and relationships with landlords under the Companies Act 2006.

Guided by licensed insolvency practitioners authorised by the Insolvency Service, the process involves making financial projections, assessing the effect of debt repayment on operations, and evaluating the possibility of long-term recovery under the regulatory framework. While some negativity can surround formal insolvency processes under English law, the CVA offers a proactive route that places the business in a stronger position whilst ensuring compliance with statutory requirements.

With the right expertise, capital, and a clear plan in place, a CVA enables directors to act with ease and maintain business continuity—delivering a viable solution for both creditors and stakeholders under the regulatory framework.

What does a CVA mean for a company?

In the context of financial recovery, a Company Voluntary Arrangement (CVA) under Part 1 of the Insolvency Act 1986 is a formal agreement that plays a key role in aiding a financially troubled company in settling debts with creditors over a fixed period whilst continuing its operations. This tool is pivotal in aiding businesses facing financial distress, providing a structured pathway towards stabilising operations without the immediate threat of liquidation.

A CVA represents an essential company rescue strategy, focusing heavily on balancing the interests of the company with those of its creditors. It is fundamentally a legally binding agreement between the company and its creditors, wherein a plan is outlined for partial or full repayment of debts over an extended period.

The importance of a CVA for a company includes:

Continuation of Trade: Allows the company to continue trading, aiding in revenue generation and business recovery.

Creditors' Interests: Aligns with creditors' interests by offering a more favourable recovery of debts compared to liquidation scenarios.

Legally Binding Framework: Ensures compliance and commitment from all parties involved through a legally enforceable agreement.

Financial Relief: Provides immediate financial relief, as it halts legal actions from creditors during the CVA term.

How does the CVA process work?

The Company Voluntary Arrangement (CVA) process under Part 1 of the Insolvency Act 1986 initiates when a company, recognising the need to address its financial difficulties, proposes a plan to its creditors for managing and repaying its debts over a specified period. This proposed CVA is prepared in collaboration with an appointed licensed insolvency practitioner, who acts as a mediator and advisor throughout the voluntary arrangements. The proposal details how the company's creditors' interests will be safeguarded whilst allowing the business to continue operating.

Once the proposed CVA is drafted, a creditors' meeting is convened to vote on the plan. For the CVA to be approved, 75% by value of the creditors who vote must agree to the terms. This threshold ensures that a substantial majority supports the approach, balancing the need to address the majority of creditors' interests.

If the creditors agree, the CVA is implemented under the guidance of the licensed insolvency practitioner, who monitors compliance and manages the distribution of payments to creditors as stipulated in the agreement. If the CVA proposal is rejected, alternative solutions, such as restructuring or liquidation, may be considered. The CVA process represents a critical opportunity for distressed companies to realign their financial strategies and obligations.

Who is eligible for a CVA

Eligibility for a Company Voluntary Arrangement (CVA) under Part 1 of the Insolvency Act 1986 is typically reserved for financially distressed companies seeking an alternative to liquidation. This option is an important business recovery method where a company, despite facing significant financial hurdles, still presents a viable path forward.

To qualify for a CVA, certain criteria must be met, ensuring that the process is suitable and has a reasonable prospect of success.

Viable Company: The company must demonstrate that it remains viable for the future. This involves presenting a sound business plan that convinces creditors of potential profitability and sustained operations.

Reasonable Prospect of Success: There must be a convincing case that the arrangement with creditors will likely return better results than proceeding directly to liquidation.

Creditors' Agreement: A significant percentage of the company's creditors must agree to a CVA. Typically, approval from at least 75% by debt value of voting creditors is required.

Financial Distress: The company entering a CVA must be actively experiencing financial difficulties but not yet in formal insolvency proceedings.

A CVA represents a structured opportunity for a struggling company to renegotiate debt terms and implement a plan to revive its fortunes, offering a more favourable outcome for all parties involved.

How does a Company Voluntary Arrangement work?

A Company Voluntary Arrangement (CVA) under Part 1 of the Insolvency Act 1986 is a formal procedure that enables a financially distressed company to repay its debts through a structured payment schedule over a set period. The CVA supervisor, typically a licensed insolvency practitioner, plays a crucial role by drafting the proposal, coordinating with the Insolvency Service, and negotiating with unconnected creditors.

Before implementation, a shareholders meeting and creditor vote are held. If approved by 75% by value of creditors, the company can continue trading and generate income whilst repaying debts, providing an alternative to pre pack administration. However, what happens if a CVA is rejected must also be considered—rejection may result in liquidation or administration.

During this process, the company's shareholders are kept informed, and employment contracts for eligible employees remain in place under the Employment Rights Act 1996. A successful CVA depends on accurate cash flow forecasts, creditor cooperation, and meeting the legal originating number of required approvals.

Steps to implement a CVA

Implementing a Company Voluntary Arrangement (CVA) begins with the company's directors seeking professional advice from licensed insolvency practitioners to assess its viability. A CVA advisor plays a pivotal role in drafting the terms of the arrangement, ensuring they are feasible for the company and acceptable to creditors. This initial step is important as it sets the foundation for the entire process.

The steps to implement a CVA include:

Proposal Development: The CVA advisor helps draft a proposal that details the company's financial situation, the terms of the arrangement, and how the company plans to manage its debt.

Creditor Approval: The proposal must be presented to creditors, who need to approve the CVA. Approval requires at least 75% by debt value of those voting to agree.

Court Approval: Following creditor approval, the proposal may need to be sanctioned by the court, especially if it affects the rights of dissenting creditors.

Implementation and Monitoring: Once approved, the company begins to make CVA contributions as outlined whilst the company remains operational and continues its business activities.

Throughout these steps, the CVA advisor must ensure each phase aligns with regulatory requirements and the company's capacity to fulfil the terms of the arrangement. Proper implementation of a CVA can provide a lifeline for struggling businesses, allowing them to restructure whilst keeping the company intact and operational.

Role of the Insolvency Practitioner

A licensed insolvency practitioner plays an important role in administering a Company Voluntary Arrangement (CVA), overseeing its execution and ensuring compliance with legal standards. This professional, typically a licensed individual or firm, is pivotal in the CVA process, acting as the mediator between the company and its creditors.

The licensed insolvency practitioner assesses the company's financial position to determine viability for a CVA, aiming to avoid creditors' voluntary liquidation by proposing a feasible repayment plan.

The practitioner's responsibilities include preparing detailed proposals for the CVA, which outline how the company intends to manage and settle its debts over a specified period. These proposals must gain approval from secured creditors, who hold significant influence due to their vested interests in the company's assets.

The licensed insolvency practitioner also conducts negotiations with all creditors, aiming to secure their support by demonstrating how the CVA provides a better outcome than potential legal actions or other insolvency procedures.

Once the proposal is accepted, the licensed insolvency practitioner monitors the company's adherence to the agreed terms, supervising financial operations to ensure that the company meets its obligations under the CVA. This oversight is essential to prevent further legal complications and to support the company in achieving a stable financial recovery.

What happens after a CVA is approved?

Once a Company Voluntary Arrangement (CVA) is approved, the company enters into a legally binding agreement with creditors to repay a portion of its debts over an agreed period. This setup allows the company to continue operating whilst managing its historic debt in a structured way. The process is supervised by a licensed insolvency practitioner who oversees that all terms of the CVA are adhered to.

Here are some key aspects of the post-approval phase of a CVA:

Monthly Payments: The company makes agreed monthly payments to the licensed insolvency practitioner, who then distributes funds to the company's unsecured creditors.

Fixed Period: The CVA typically lasts for a fixed period, usually between 3 to 5 years, after which any remaining debt is often written off, assuming the CVA is successful.

Core Business Focus: The company can focus on its core business without the immediate threat of closure, enhancing the company's ability to generate revenue and fulfil the CVA terms.

Existing Contracts: The company generally retains the ability to continue with existing contracts and business operations, which helps stabilise operations during the CVA period.

Successfully managing a CVA requires careful oversight and adherence to the agreed terms throughout the designated period.

What are the Company Voluntary Arrangement advantages and disadvantages?

A Company Voluntary Arrangement (CVA) under Part 1 of the Insolvency Act 1986 offers a way for struggling businesses to continue operating whilst settling company debts. It provides breathing space from creditors' pressure and allows the company to remain in control with directors, offering a reasonable chance of recovery.

Compared to liquidation, a CVA often proves the best option when companies want to maintain relationships with suppliers and creditors such as HMRC, who may act as key representatives during voting. Members must approve the arrangement, and the proportion of debt to be repaid is critical.

Though terms vary depending on circumstances, a CVA helps avoid full closure. However, it can harm the business's credit and affect future trading. Directors are advised to seek a free consultation from licensed insolvency practitioners to assess suitability.

The company remains registered under the Companies Act 2006, must manage its tax obligations including HMRC requirements, and ensure members are informed. For example, failing the CVA terms may lead to liquidation, making the decision a serious concern.

Key advantages of a CVA

Company Voluntary Arrangements (CVAs) under Part 1 of the Insolvency Act 1986 offer several key advantages, including the ability for a business to continue operating whilst addressing its financial obligations. CVAs present a strategic option for business recovery and can be a preferable alternative to more severe measures such as creditors' voluntary liquidation.

Key Advantages of a CVA:

Continued Control by Existing Management: Unlike other insolvency processes, a CVA allows the existing management to retain control over the company's affairs, fostering stability and continuity.

Legally Binding Agreement: Once approved, a CVA legally binds all creditors, preventing individual actions that could interfere with the recovery plan.

Flexibility in Terms: CVAs provide the flexibility to negotiate terms that are feasible for the business, potentially including reductions in debt amounts or changes in repayment terms.

Protection from Legal Action: During the term of a CVA, the company is protected from legal actions by creditors, allowing the business to focus on recovery and operations without the threat of immediate liquidation.

These CVA advantages enable a company to address its financial issues whilst maintaining its operational integrity, offering a lifeline to recover and avoid the potential dissolution of the business.

Disadvantages of a CVA to consider

While Company Voluntary Arrangements under Part 1 of the Insolvency Act 1986 offer significant benefits, they also come with several disadvantages that need careful consideration. One of the primary disadvantages of a CVA is the uncertainty surrounding its outcome. If a CVA fails, the company may still end up facing insolvency proceedings, which can lead to more severe financial consequences. This risk is particularly acute if the company is already contingently insolvent, meaning its assets are insufficient to cover its liabilities.

Another significant disadvantage is the cost involved in arranging and maintaining a CVA. The CVA cost not only includes initial setup fees but also the ongoing cost of supervising the arrangement by licensed insolvency practitioners, which can be substantial. These costs can strain the financial resources of a company that is already in a precarious position.

Additionally, stakeholders and creditors might challenge the CVA, leading to potential legal disputes that can further delay the recovery process. During a CVA, creditors are barred from taking action against the company, but this protection can evaporate if the arrangement breaks down.

Lastly, being affected by a CVA can damage a company's reputation, making it harder to secure future business deals or credit. The stigma of having been insolvent, even contingently, can linger long after the CVA is completed.

How does a CVA compare to company liquidation?

Comparing a Company Voluntary Arrangement (CVA) under Part 1 of the Insolvency Act 1986 with company liquidation reveals distinct advantages and challenges. A CVA offers an opportunity for a struggling company to restructure its debts whilst continuing operations, which contrasts sharply with company liquidation—either as a creditors' voluntary liquidation or compulsory liquidation—that typically closes down an insolvent business.

Here are some key points to take into account:

Continuity vs. Cessation: A CVA allows the business to remain operational and potentially return to profitability, whereas company liquidation ends the company's existence.

Control: In a CVA, the current management retains control of the company, subject to the creditors' approval of the CVA plan. In contrast, liquidation or administration involves appointing administrators or a liquidator who takes over the company's management.

Impact on Creditors: CVAs can provide a better return to creditors compared to liquidation, as the business can continue generating revenue during the CVA process.

Public Perception: Entering into a CVA can preserve the company's reputation better than liquidation, as it demonstrates an effort to pay debts and sustain the business.

Choosing between a CVA and company liquidation depends on the specific circumstances of the insolvent business, which goes beyond mere financial recovery and involves strategic decisions about the future of the company.

How much does a CVA cost?

The costs associated with a CVA under Part 1 of the Insolvency Act 1986 can vary significantly, depending on factors like the company's size, income, and the complexity of its debts. While aiming to reduce costs, it's important to note that some arrangements may lead to lower costs than traditional insolvency procedures.

CVA fees are typically structured to be paid over some time and are held in a trust account managed by a licensed insolvency practitioner. This ensures transparency and fairness in how creditors receive their repayments.

In some cases, directors continue managing the business under supervision by licensed insolvency practitioners, enabling operations to stay on track whilst dealing with creditor obligations. When members agree on the proposed terms, it increases the likelihood of a successful outcome and can reduce the risk of escalated creditor action.

If the CVA succeeds, it may prevent liquidation, allow for restructuring, and even lead to the emergence of a new company structure that is more financially stable—ensuring better relationships with the bank and suppliers going forward.

Factors affecting CVA costs

The cost of a Company Voluntary Arrangement (CVA) under Part 1 of the Insolvency Act 1986 is shaped by several key factors, including the company's size, the complexity of its debts, and the fees charged by licensed insolvency practitioners. These costs can differ significantly based on the specific circumstances surrounding each case.

The process of proposing a CVA requires a detailed analysis of the company's financial situation and the preparation of a proposal that must be agreeable to both the indebted company and its creditors.

Size and Financial Complexity of the Company: Larger companies with more complex debt structures typically incur higher costs due to the increased analysis and management required.

Licensed Insolvency Practitioner Fees: Fees can vary considerably based on the practitioner's experience, the firm's prestige, and regional differences.

Legal and Advisory Costs: Legal advice and financial consultancy during the proposing and supervising of the arrangement add to the overall expenses.

Duration of the CVA: The agreed period over which the CVA operates can affect costs, as longer terms may require ongoing supervision and administration by licensed insolvency practitioners.

Company Voluntary Arrangements are strategic tools aimed at restructuring debt without resorting to creditors' voluntary liquidation. The terms of a CVA and its successful completion hinge on careful planning and execution. As the typical CVA ends, the company aims to emerge more financially stable, having adhered to a mutually agreed plan.

Can a company afford a CVA?

Evaluating whether a company can afford a CVA under Part 1 of the Insolvency Act 1986 involves analysing both the direct costs and the broader financial implications of the arrangement. The process begins by considering the initial setup and consultancy fees charged by licensed insolvency practitioners, which can vary widely but are essential for a professionally managed CVA. Additionally, the company must assess its ongoing ability to generate adequate cash flow to fulfil the revised obligations to creditors.

A CVA allows for a structured repayment plan, which can lead to significant cost reduction in the long term. This is particularly beneficial if the alternative is creditors' voluntary liquidation, where the potential loss of control and higher costs could be detrimental. The decision of whether a CVA is in the best interests of the company involves scrutiny of its financial forecasts and operational viability.

The advantages of a CVA include the ability to continue trading and potentially return to profitability, which can improve the company's prospects and its ability to pay creditors. However, whether a CVA is feasible also depends on the creditors' acceptance of the terms, as their cooperation is essential. Therefore, a company may pursue a CVA if it aligns with strategic financial restructuring and promises a sustainable business model moving forward.

Is My Company Eligible for a CVA?

Determining whether a company is eligible for a Company Voluntary Arrangement (CVA) under Part 1 of the Insolvency Act 1986 involves understanding specific criteria that must be met. It's often recommended to begin with a professional enquiry from licensed insolvency practitioners to evaluate the business's financial standing and suitability for the CVA process.

Businesses experiencing financial distress should quickly assess whether restructuring debts through a CVA is achievable. If financing a company in a CVA is possible and the business can reorganise its operations effectively, this option may offer a viable path forward.

The purpose of a CVA is to allow companies to trade out of difficulty by repaying creditors over time. Directors must be confident in the company's ability to return to profitability and maintain obligations such as PAYE and VAT to HMRC.

A critical part of eligibility is creditor approval, which typically depends on whether the repayment proposal reflects at least the average expected return in insolvency. Directors might feel worried about outcomes such as redundancy for staff under the Employment Rights Act 1996, but a CVA can sometimes avoid more severe alternatives.

Ultimately, the person managing the process—usually a licensed insolvency practitioner—will help assess whether the CVA is a realistic and compliant strategy for your business.

Eligibility Requirements for a CVA

Eligibility for a Company Voluntary Arrangement (CVA) under Part 1 of the Insolvency Act 1986 hinges primarily on the company's ability to demonstrate sustainable future cash flows and a viable business plan. This tool, under company law established by the Companies Act 2006, is designed to help viable businesses that are currently unable to meet their debt obligations, offering an alternative to creditors' voluntary liquidation. It allows an insolvent company to continue operating, thereby retaining employees and providing a better outcome for creditors in the long run.

The specific eligibility criteria for a CVA include:

Insolvency Status: The company must be insolvent either on a cash-flow basis (unable to pay debts as they fall due) or on a balance sheet basis (liabilities exceed assets).

Approval from Creditors: A CVA must be approved by at least 75% by value of the creditors who participate in the vote, affirming that it is in their best interests.

Viable Business Model: The company must present a realistic and viable business plan showing that the company will be able to generate future profits.

Director's Commitment: Directors must be committed to restructuring and must act in the best interests of the company and its creditors.

These criteria ensure that only limited companies genuinely in need of restructuring yet capable of recovery can utilise a CVA.

When Should a Company Consider a CVA

A Company Voluntary Arrangement (CVA) under Part 1 of the Insolvency Act 1986 should be considered when a company, despite facing insolvency, demonstrates potential for future profitability and sustainable cash flow. This contrasts with more severe measures like creditors' voluntary liquidation, which typically marks the end of a business's operations. A CVA can provide a structured opportunity for a company to manage its outstanding debts whilst continuing to trade, hence maintaining its core business functions.

For a CVA to be a viable option, the existing directors must be willing to work collaboratively with professional guidance from licensed insolvency practitioners to create a proposal that unsecured creditors will accept. This aspect is essential since a CVA requires the approval of creditors representing at least 75% of the debt value. As a result, the directors must convincingly demonstrate that the CVA could lead to a better return for creditors than other insolvency procedures, such as a winding up petition.

In deciding whether a CVA will ideally suit a company, stakeholders should consider its ability to generate steady revenue post-arrangement and whether the business model can adapt to changes necessary for long-term viability. Engaging with experienced licensed insolvency practitioners early in the process can greatly enhance the likelihood of developing a feasible and acceptable CVA proposal.

What happens if a CVA is not approved?

If a Company Voluntary Arrangement (CVA) under Part 1 of the Insolvency Act 1986 is not approved, the immediate question arises: What happens if my CVA is rejected? The business must quickly assess the contents of the rejected proposal and put together an alternative strategy.

Rejection of a CVA can signal a deeper problem with the company's financial health. This turning point requires directors to keep in mind the potential impact on all stakeholders. In addition, they should gather all available information to evaluate the most appropriate choice moving forward.

One option might involve reviewing eligibility for a loan for a company in a CVA, though this can be challenging without creditor confidence. Directors should also remember that the fit of any new plan must align with the company's financial capabilities and creditor expectations.

When a CVA is no longer viable, the business might face more serious procedures such as administration or liquidation. Creditors may not receive full repayment, and timelines could be extended, impacting their operations. Careful thought and professional advice from licensed insolvency practitioners are essential to navigate these complexities and protect the interests of all involved parties.

Alternatives to a CVA

When a Company Voluntary Arrangement (CVA) under Part 1 of the Insolvency Act 1986 fails to gain approval, businesses must consider alternative strategies for debt resolution and restructuring. Not achieving the requisite majority for a CVA can lead limited companies to explore other insolvency processes or restructuring methods that allow the business to manage its obligations whilst attempting to continue operations.

Directors need to understand the advantages and drawbacks of each option to make well-informed decisions that align with the best interests of the business and its creditors.

Alternatives include:

Creditors' Voluntary Liquidation (CVL): This process is initiated by the directors when a company is insolvent and cannot pay its debts. It involves the orderly winding-up of company affairs and selling assets to pay creditors.

Administration: This process allows the business to be restructured under the management of an appointed administrator, who works to achieve the best possible outcome for creditors.

Refinancing or Restructuring: Seeking new financing or renegotiating existing debts can provide the business with a lifeline to overcome financial distress.

Government Schemes: Utilising available government relief programs designed to help businesses facing temporary hardships due to economic downturns or other crises.

Each option demands thorough evaluation and, often, consultation with financial and legal advisors including licensed insolvency practitioners.

Consequences for the company and its creditors

Understanding the consequences for both the company and its creditors when a Company Voluntary Arrangement (CVA) under Part 1 of the Insolvency Act 1986 is not approved is essential for informed decision-making. If a CVA is rejected, the company may face harsher alternatives, such as creditors' voluntary liquidation, which effectively closes a company. This path often results in selling off businesses and assets to repay debts, which might not be the most favourable outcome for a company with two shareholders or more, who could lose significant control and future profits.

When a CVA is not approved, the future of the company and the arrangement will be decided by the creditors, which could lead to immediate financial distress. A CVA-based approach allows the company to continue trading whilst addressing debt obligations, which could help your business stabilise and recover. Without this approval, the company lacks the protective shield against legal actions from creditors, potentially leading to forced asset liquidation.

Here is how outcomes compare:

Conclusion

To sum up, a Company Voluntary Arrangement under Part 1 of the Insolvency Act 1986 represents a viable option for businesses seeking to manage financial distress through structured repayment of company debts whilst maintaining operational continuity.

This approach, commonly used under the regulatory framework, enables businesses to apply for legal protection whilst they negotiate revised payment terms with creditors. It is a fact that a CVA can provide a more flexible and less disruptive solution than liquidation, especially for companies expecting a rise in projected cash flow forecasts.

By facilitating negotiations with creditors under the supervision of a licensed insolvency practitioner, a CVA allows the business to continue trading under normal conditions. Matters such as whether a loan for a business in a CVA is possible, or if certain assets can be transferred, must be addressed in depth and with professional advice from licensed practitioners.

However, the success of a CVA depends on creditor approval and the business's ability to stick to the agreed terms. This makes strategic planning and financial discipline crucial. Fortunately, free guidance is available from licensed insolvency practitioners to help businesses learn more about how a CVA works and whether it's the right option for their situation. Alternatively, other solutions may be more suitable depending on the difficulty of the case and expected financial recovery.