A Company Voluntary Arrangement is an arrangement between a company and its creditors to pay an affordable proportion of debts over a period of 3-5 years with the remainder legitimately written off. All of the company’s unsecured debts including trade creditors, tax, VAT and PAYE are rolled into the CVA. The company can continue to trade with the current directors in place and creditors will receive a greater dividend than in a formal insolvency, such as administration or liquidation.
Insolvent, or potentially insolvent Limited companies or Limited Liability Partnerships are eligible for a Company Voluntary Arrangement. A business must be considered at least potentially viable for financial turnaround.
No. With a CVA there is no legal requirement to inform the public or customers of your situation.
A CVA can be proposed at any time. The directors within the business can propose a Company Voluntary Arrangement, even if the business is under threat of a winding up order or other legal action by creditors such as county court summons, distraint by a bailiff or HMRC or a landlord. Creditors or shareholders cannot make the initial proposal, but a majority will need to approve the plan for it to be binding on all, even those that vote against the plan.
A nominee (expert practitioners such as Cashsolv) work with directors to prepare a proposal for a Company Voluntary Arrangement.
A Company Voluntary Arrangement should be approved by at least 75% of the creditors by value of debt who actually vote and 50% of shareholders. Creditors can vote in person at the meeting of creditors or more usually by proxy form.
All creditors other than secured lenders, such as banks, are bound by the Company Voluntary Arrangement, regardless of if they attended the meeting or were within the 25% by value that may have disagreed with the proposal and actually voted against it. Once a CVA is in place then your business is protected against any legal action from all the unsecured creditors, including those that voted against the proposal.
There are unlimited variations, it always depends on your circumstances and the proposal will be designed to suit your business, but generally your business will pay a single affordable monthly payment based on sound cashflow forecasts into a trust account, out of which payments calculated as pence in the £, are made to all creditors.
On average payments to creditors through a CVA would be 40p in every £1 or under, over a period of 3 – 5 years but you can make arrangements for more or less, it depends on what you can afford and what creditors will accept.
A CVA can be approved in as little as 4 weeks, but it will depend on the individual circumstances and complexity of situation. On average it will take 6-8 weeks for the entire approval process to complete and the arrangement will last as long as required for the offer to creditors to be fulfilled.
A nominee is the expert insolvency practitioner who sets out the Company Voluntary Arrangement and will act as chair during the meeting of creditors and shareholders. Upon approval the practitioner becomes the Supervisor, responsible for monitoring compliance with the terms including collecting and distributing the money to creditors.
HMRC have an obligation to provide a better financial return for the tax payer, as opposed to winding up a business. It is usually in everyone’s best interest to allow the company to continue to trade. As HMRC are involved in nearly all CVAs as a creditor they have become pretty used to the issues involved and follow a fairly standardised approach.
As involuntary creditors (they didn’t agree to provide credit!) their ‘unique’ concern is whether they are likely to incur further losses as a result of their position and not being able to prevent future new debts to them being incurred. At Cashsolv we have a great deal of experience dealing with HMRC and are well practised in how to overcome their objections.
Overall a Company Voluntary Arrangement is usually very cost effective due to paying off a proportion of debts over a longer period and the non-involvement of the Courts. The costs involved include the ‘nominee’s fee’ which will depend on the firm you select to represent you. On average this cost is around £3-10,000, but in some cases can be considerably more. There is also a cost for the ‘supervising’ of the arrangement which, can vary between £2-3,000 per year, depending on the number of creditors and the complexity of the proposal. These fees are typically paid out of the trust account fund and affordable as the debts to existing creditors are ‘suspended’ in the arrangement.
Employees will normally be supportive of a CVA and relieved to see a future for the business. It is best to be open and honest with your employees, you will be unable to stop those that wish to leave for another job, but you can implement strategies to retain key employees such as offering bonuses or even longer term share packages.
Whilst employees may be supportive, redundancies can be inevitable in some cases as a necessary step to reduce costs to make the business viable. A CVA qualifies employees to receive their redundancy, arrears of salary and holiday directly from Government, so the employees don’t loose out but the business doesn’t need to find huge lump sums to make the payments. However, it is advisable to try to pay salary and holiday pay up to date as a goodwill gesture, although if this is not possible the employees can still get this money under the government scheme.
The success of a CVA will largely depend on the ability of the team of directors to make the required changes to turnaround the business during the period of the CVA. At Cashsolv we have experienced many successes with CVAs that we have designed and implemented on behalf of clients.
If a company can no longer honour their commitments under the Company Voluntary Arrangement then a further meeting of creditors can be arranged and the terms varied with the agreement of creditors or if no longer appropriate the CVA can be brought to an early end.
No. Under a Company Voluntary Arrangement you are not personally liable for the company’s debts, unless for some reason you have given a personal guarantee. Even if you have provided a guarantee, a CVA will help as you are only liable if the company cannot pay and by continuing in business you will have retained a source of income.
Yes. A Company Voluntary Arrangement does not affect your director status and does not require an investigation into the affairs of the company or the directors of the business.
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Contact us if you have a specific question that you would like answered, or wish to discuss a possible CVA in confidence.