A CVA (Company Voluntary Arrangement) is a viable formal process businesses can take to pay off creditors over a fixed period of time. It can be a worthwhile path to take compared to insolvency or liquidation, but it can come with some drawbacks.
At Griffin & King, our licensed insolvency practitioners have acted on behalf of businesses and performed many company voluntary arrangement procedures. This is a complete guide on the benefits and disadvantages of a CVA as well as details on the role of directors and creditors.
What Is a Company Voluntary Arrangement?
A company voluntary arrangement (CVA) lets a business facing insolvency pay off creditors over a fixed period if at least 75% of creditors agree, allowing for the business to continue trading. The period of repayment is typically over the course of three to five years, and the directors of the business remain in control as opposed to the business being handled by appointed administrators.
Who Is a CVA Suitable For?
Choosing a CVA is the ideal and most suitable option for businesses to take under certain circumstances. It’s best suited to businesses that are fundamentally viable but facing financial pressure, including winding-up petitions. A CVA works well for companies with manageable debt levels and a realistic prospect of returning to profitability.
Common sectors that proceed with a CVA include retail, hospitality and construction, where cashflow challenges and creditor pressure are frequent and seasonal. However, a CVA might not be appropriate for businesses with no clear path to recovery, excessive debt or insufficient ongoing income to maintain agreed repayments.
Advantages of a Company Voluntary Arrangement
Company voluntary arrangement procedures offer businesses and their directors several advantages over other insolvency processes.
- Time to repay debt – businesses can avoid liquidation and pay back debts to creditors over the course of a few years
- Directors stay in control – directors remain at the helm and work alongside the guidance of insolvency practitioners, like the team at Griffin & King
- Interest and charges frozen – all winding-up petitions and interest on CVA debt is frozen
Consolidated, affordable repayments – businesses arrange repayments that they can afford and are realistic to their current financial situation - Upheld reputation – businesses can avoid the stigma of liquidation, helping to preserve brand value and client reputation
Disadvantages and Risks of A CVA
While there are plenty of benefits, there are a handful of risks you should know about when proceeding with a company voluntary agreement.
- Public record – a CVA is recorded on the public register at Companies House, meaning clients, suppliers and competitors know the business has entered into a formal insolvency process
- Credit rating – a business’s credit rating can be damaged and make accessing finance more difficult in the future
- Approval not guaranteed – at least 75% (by debt value) of creditors must agree to the arrangement, which is not always a guarantee
- Risk of failure – if agreed payments aren’t maintained, the CVA can fail and potentially lead to liquidation
What Happens to Directors During a CVA?
During the company voluntary arrangement procedure, directors remain in control of running the day-to-day operations of the business. However, they must act in the best interests of creditors and ensure the business complies fully with the agreed CVA terms.
- Personal liability implications – a CVA does not automatically make directors personally liable for company debts, provided they have acted lawfully and responsibly
- Overdrawn director loan accounts – any overdrawn loan accounts may still need to be repaid and can be reviewed as part of the arrangement
- Guarantees and personal exposure – personal guarantees given to lenders or suppliers remain enforceable, meaning creditors can still pursue directors individually if the company defaults
How Does a CVA Affect Creditors?
Creditors also have key responsibilities and have to follow certain rules during a company voluntary arrangement, including:
- Treatment of unsecured creditors – unsecured creditors are typically repaid a proportion of what they are owed over an agreed period, with remaining balances written off at the end of the CVA if the terms are met
- HMRC position – HMRC is often a key creditor and will review proposals carefully, usually supporting arrangements that offer a better return than liquidation
- Trade suppliers – suppliers may continue trading under revised terms, although some may tighten credit or request payment up front
What Happens if A Company Voluntary Arrangement Fails?
There is always the risk that creditors won’t agree to proceed with a CVA, as well as the risk of failure during the procedure. A CVA can fail if the company misses agreed payments, experiences worsening cash flow or if directors can’t meet ongoing trading obligations.
If the arrangement defaults, creditors may take legal action to recover debts. In many cases, the company will move into administration or liquidation, both of which we support businesses with here at Griffin & King.
Administration may provide short-term protection while exploring rescue or sale options, whereas liquidation results in the company being wound up and its assets realised for creditors.
Would A Company Voluntary Arrangement Be Right for Your Business? Speak To Our Professionals Today!
The licensed insolvency practitioners at Griffin & King are here to support business directors with company voluntary arrangement procedures. We communicate with creditors and become your CVA supervisor to help get your company into a viable, financially secure position. We understand this is a very stressful and sensitive time, and you can rest assured our team puts your best interests first.
Get in touch with our team on 01922 722 205 or send your details to enquiries@griffinandking.co.uk.
