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Would Your Business Benefit from a CVA?

Whilst a Company Voluntary Arrangement (CVA) is a legally binding agreement, it is basically a deal between an insolvent company and its various creditors. The deal is detailed within the terms of the CVA proposal to be circulated to the creditors and shareholders of the insolvent company for their formal approval at subsequent meetings.

The deal will need to show the creditors and shareholders of the insolvent company why they would be better off approving the CVA proposal versus rejecting the CVA for an alternative insolvency method (such as a CVL).

The terms and obligations of the deal are detailed within the CVA proposal and these will detail how much and when the insolvent company is required to pay contributions to the supervisor of the CVA. The CVA will also provide creditors with the estimated level of recovery to the insolvency company’s creditors (i.e. whether the creditors will be repaid in full or in part for the debt due to them).

The usual term a CVA is in place is anything up to 60 months, with the insolvent company paying contributions to the supervisor in accordance with the terms of the proposal (e.g. this can be a contribution from ongoing profits or a fixed amount, say on a monthly basis).

Successfully entering into CVA (with any modifications) proposed and approved at the meetings of creditors and shareholders’ will leave the company directors in control of the business. A well structured CVA can rapidly improve cash flow whilst providing the company with a rest bite from creditor action. It will put a halt to the immediate demands of your creditors, including the tax office (HMRC), postpone any possible insolvency petition and enable you to restructure your business. It could result in the Company’s creditors being repaid more of the money they are owed then they would otherwise receive if the Company simply ceased to trade, in addition to enhancing the chance of retaining the jobs of the employees for the long term.

Whilst the deal (CVA) is a legally binding agreement and accordingly fairly rigid in its structure, stating what the minimum amount is to be paid on given dates during the lifetime of the arrangement, the directors do not have the benefit of hindsight when they originally agree to the terms of the CVA (with any modifications). Should the insolvent company subsequently struggle to fulfil its obligations under the CVA (i.e. fail to pay its monthly contributions due to a drop in profits or following a cancellation or postponement of a significant order(s)), then the Insolvency Rules does provide the directors with some flexibility.

The insolvent company can, through the supervisor, seek a variation to the original deal and subject to the necessary approval a reduced level of monthly contributions or a payment holiday may even be granted. The reasoning behind variations to the original deal, is to ultimately encourage turnaround and business rescue by assisting a company bound by a CVA with a change in circumstances that could never have been predicted at the outset “without the assistance of a crystal ball”.

A properly drafted and approved CVA can be an excellent means of turning a company’s business around whilst dealing with all of its debt problems. The directors must be fully committed to saving the business from the outset of the CVA, as they will remain in control along with the company’s shareholders. Quite often the full implications of the deal are not understood or appreciated by the directors of an insolvent company when they originally seek to obtain approval of the CVA. At My Insolvency we pride ourselves in letting you have the full picture and not merely a snap shot through “rose tinted glasses” when you commence the process.

Upon the successful conclusion of the CVA, the company will be debt free of any historical debts bound under the terms of the CVA (any outstanding debt that remains unpaid is then written off). It should not however be ignored that failure to adhere to the terms of the CVA will likely lead to the company being placed into liquidation and could in turn result in action being taken by any subsequently appointed liquidator against the company’s directors.

If you think a CVA may be right for your business, or you are in financial crisis then get in touch today with one or our qualified and regulated advisers at My Insolvency. We will discuss your company’s position, look to understand your concerns and your aspirations for your business whilst exploring all of the various options available to find the best solution for both you and your business. Contact us now at My Insolvency to arrange a free, confidential consultation with no obligation.