A Company Voluntary Arrangement (CVA) can be used as an effective business rescue tool for companies that are struggling to pay their liabilities. A CVA is a binding contract between a company and its creditors to pay back some or all of its liabilities over a specified period of time. The main advantage of a CVA is that it immediately alleviates creditor pressure, allowing directors to remain in control of the company and wipe clean all debts by the end of the process.
The main objective of a CVA is to rescue the business so that it can continue to trade in the future. In the majority of cases, CVA’s are successful, enabling businesses to pay off their debts and return to profitability after the course of the arrangement. Key considerations are made before a company is able to enter a company voluntary arrangement, to ensure that it will be a success. The following essential steps are taken to ensure that the process is a realistic option for the company:
- Directors must draft a proposal detailing the contributions the company will make to the CVA, how this will be supported by cash flow forecasts, and a detailed timeline of when payments will be made
- Once the proposal has been drafted, a licensed insolvency practitioner will be appointed as Nominee to review the proposal and assess the likelihood of success based on the information provided
- The proposal is then filed to court before being circulated to creditors. Crucially, at this stage, at least 75% of creditors must vote in favour of the proposal in order for it to be approved
This means that careful consideration and planning is taken under the direction of a licensed insolvency practitioner in order to ensure that the CVA will be a success.
What Happens At The End Of A CVA?
A CVA typically lasts between 3-5 years depending on the level of debt involved, and the means that are available to the company to repay it. If the process has been successful, any debts that were included in the proposal should be written off. This will allow the company to continue trading as normal without needing to make the agreed monthly payments to creditors. As a CVA enables businesses to continue trading throughout the process, the company should be in a strong enough position at the end of the arrangement in order to continue thriving, free from debts.
What Happens If A CVA Fails?
Whilst in the majority of cases, CVA’s tend to be a success, there are of course instances in which the arrangement may unfortunately fail. A CVA will fail if the terms of the agreement are not met i.e if the repayments are not paid on time as specified in the agreement. If the terms are breached like this, the appointed insolvency practitioner will look at ways to modify the agreement if possible. If a modification is not achievable or accepted by creditors, then steps will be taken for the company to be wound up. In most cases this will happen via a compulsory liquidation, unless directors and shareholders can voluntarily take steps to place the business into Creditors’ Voluntary Liquidation (CVL).
If your business is struggling financially and you would like to discuss the option of a CVA, please don’t hesitate to get in touch with the team at Ballard Business Recovery today. We can assess whether a company voluntary arrangement is a realistic prospect for your business, and advise on alternative business rescue options if this is more suitable.
