If your company is insolvent, you might be considering a Company Voluntary Arrangement (CVA) to help you pay your creditors back over a fixed period. A CVA is only available through a licensed insolvency practitioner, who will be in control of the entire process.
This kind of arrangement could help your business survive its debt and prevent it from being wound up. Here is what you need to know about Company Voluntary Arrangements:
What is a CVA?
Put simply, a CVA is an agreement between you and your creditors for how you are going to repay your debt over time – or a portion of the debt. It is a legally binding contract that typically lasts between one and five years.
The process begins when your insolvency practitioner proposes a CVA to your creditors and invites them to a meeting to vote on the proposal. A vote of at least 75% in favour – of the creditors that turn up to the meeting – is needed for the CVA to be agreed upon. If it is approved, any creditors that voted against the CVA or did not vote will still be bound by it.
Once your CVA is underway, creditors will then be unable to take steps against your company that the terms of the CVA prevent. This includes trying to claim payment of debts that falls within the scope of the CVA. Your company will make its scheduled payments to your creditors via your insolvency practitioner as per your arrangement. If you fail to pay, your business will likely be wound up via compulsory liquidation.
How Does a CVA Happen?
A CVA is one of the options for an insolvent company or a company that is engaged with an insolvency practitioner that can prove that the business is still viable. The process provides companies with an exit from administration that allows you to repay your debts while halting creditors from taking action against you.
An insolvency practitioner will assess your business and may deem you eligible for a CVA if they believe your business is viable and stands a chance of returning to profitability.
Advantages and Disadvantages of a CVA
Advantages of a CVA
Retain Control: The director keeps control of their company, so you can use your professional knowledge of the ins and outs of your business to afford your company the best chance of a successful turnaround.
Lower Costs: Setting up a CVA is a less financial undertaking than other insolvency procedures, helping to improve cash flow and increase the amount of working capital available. Additionally, your insolvency practitioner’s fees are included in the fixed payment amount each month, so you won’t have to worry about making separate, additional payments.
Continue Trading: While in a CVA, your business can stay open and keep trading as normal, giving you the best chance of survival.
Prevent Legal Action: With a CVA in force, winding up petitions cannot be instigated.
No Repayment Demands: Once your creditors accept the terms of the CVA, they are prevented from threatening to take legal action so long as the agreed terms are adhered to.
CVA Not Made Public: It is not a requirement that your business tells your customers about your CVA, making it a private matter between you and your creditors.
Disadvantages of a CVA
Credit Rating: Your company’s credit rating will be adversely affected, making it harder to obtain credit from new suppliers.
Long Timespan: Your CVA can run for several years, so once you’ve agreed you will be obligated to fulfil the terms of the arrangement possibly for up to five years.
Secured Creditors not Bounded: The terms of the CVA do not bind HMRC or the bank, so they could still withdraw funding or push for liquidation.
CVA Failure: If your CVA fails due to not keeping up with repayments, creditors can take legal action against your business.
A CVA may be the most suitable option for your company, or you may end up having to close down before your creditors can wind up your business. Dealing with business debt can be a stressful time, which is why an experienced and knowledgeable insolvency practitioner like Hudson Weir Insolvency Practitioners can help guide and advise you, providing a recovery strategy for struggling businesses.