Company Voluntary Arrangement (CVA): A Powerful Solution for Indebted Companies

While the information about Individual Voluntary Arrangement (IVA) is readily available to the general public, not many people know about the existence of Company Voluntary Arrangement (CVA), which is a powerful tool for preventing a distressed company from going under. CVA is a part of the UK law that can be defined as a legally binding deal between a Limited Company and its Creditors. This solution allows the company that is on the brink of insolvency to continue to trade as normal without being harassed by its unsecured creditors and gradually repay the debt over a specified period of time.

The whole procedure goes like this. First of all, the company’s directors are having a meeting with an insolvency practitioner. Ideally, all the directors should be present at this meeting because they are supposed to work as a team with the aim to help the company solve its cash flow problems. The insolvency practitioner is provided with all the necessary information regarding such aspects of the company as its assets, liabilities, potential revenues, etc. It is essential to follow the advice of the insolvency practitioner right away instead of procrastinating until the state of the company has deteriorated so that nothing can be done about it. In addition, at the first meeting with the insolvency practitioner the need to prepare forecasts for cash flow and the general terms of the proposed voluntary arrangement will be discussed. As a rule, the terms are based on the company paying a specified amount of money each month into a fund regulated by the insolvency practitioner for the profit of the creditors. Payments are typically made for a period of up to five years but it can be much shorter than this. It should be noted that payments made under CVA are accepted by creditors in full and final settlement and that in most cases a company doesn’t have to pay its debts in full.

If the directors choose to enter into a CVA they ask the insolvency practitioner to prepare a proposal, the purpose of which is to describe all the circumstances to provide the creditors with all the information needed for making a decision as to whether they agree to support the CVA proposal. As soon as the proposal is filed at the local county court, creditors no longer have legal rights to initiate court proceedings against the company. After that creditors and shareholders of the company receive copies of the CVA proposal and the insolvency practitioner's report to the court and get informed about the date of meetings. From this moment on the insolvency practitioner becomes a mediator between the company and its creditors.

Generally, SMBs are not confronted with any difficulties during the meeting of shareholders because they are often the same individuals as the company’s directors. Besides, in some cases the consent of the shareholders is not obligatory. As for the meeting of creditors, it is crucial because the CVA terms must be approved by not less than 75% of the creditors. If this is the case, the minority of creditors who voted against the CVA proposal have no right to start court proceedings against the company to recover borrowed money. However, this is only the beginning of the CVA process.

Typically, the supervisor (insolvency practitioner who prepared the proposal) and the directors will hold meetings on a regular basis where they will discuss the current situation of the company. In case the company finds it impossible to fulfill the terms of CVA a new meeting with the creditors can be organized for the CVA terms to be reconsidered. However, the changes of the terms will come into effect only if not less than 75% of all the creditors give their consent.

Naturally, the CVA cannot be called a solution for all UK companies which face insolvency. Thus, if the company’s financial problems stem from a long term decline in the customer base or ongoing competition which leads to inadmissibly low gross profit margins, it may be impossible to meet the CVA terms. Still, if the company’s directors acknowledge their problems in time, not letting the situation aggravate, the CVA solution may turn out to be successful and the company may avoid liquidation.

 


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