A CVA (Company Voluntary Arrangement) is a formal process where an insolvent company can continue to trade while paying off debts to creditors over a fixed period. The CVA process is a viable chance to help save a company from going into liquidaiton.
This is a complete guide to explain the Company Voluntary Arrangement process, from the key steps to the responsibilities of company directors, licensed insolvency practitioners and creditors.
What Is a Company Voluntary Arrangement
A Company Voluntary Arrangement (CVA) is a formal insolvency procedure that allows a limited company in financial difficulty to reach a legally binding agreement with its unsecured creditors to repay all, or part, of its debts over time. The CVA procedure is designed to help viable businesses avoid liquidation by restructuring their liabilities into affordable monthly payments.
The primary purpose of a CVA is to give a company breathing space from creditor pressure while continuing to trade and recover financially. A Company Voluntary Arrangement comes with a few requirements; 75% or more of creditors must agree to the arrangement, and even creditors that didn’t agree must adhere once the legally binding process is in place. Unlike Administration, the directors of the company still remain in control throughout, with the process typically lasting between three and five years, depending on specific financial circumstances.
When and Why Companies Use a CVA
Although the business will be classed as insolvent, meaning it’s unable to meet financial obligations, the CVA process will be considered if the appointed licensed insolvency practitioner is satisfied that the business can still operate while paying back debts to creditors.
Often, businesses proceed with a CVA due to short-term cash flow or debt problems. Issues like this often crop up during seasonal downruns, one-off losses and restructuring. Choosing a Company Voluntary Arrangement is one of the best options to avoid liquidation, and offers several benefits compared to other insolvency and corporate rescue procedures, including:
- Directors stay in control of business operations
- Creditors can often get a better return compared to the alternative, insolvent liquidation process
- Businesses can avoid making redundancies
- Interest on debts is frozen to prevent the financial situation from worsening
Step-by-Step CVA Process
1. Initial Assessment
The Company Voluntary Arrangement process begins with directors consulting a licensed insolvency practitioner (IP), such as Griffin & King, to review the company’s financial position. The assessment examines cash flow, assets, liabilities, creditor pressure and overall business viability. The IP determines whether the company is fundamentally viable and whether a CVA is the most suitable solution compared to alternatives such as administration or liquidation. If appropriate, the IP will advise on the likely structure and affordability of a proposed repayment plan.
2. Drafting the CVA Proposal
If a CVA is considered viable, the insolvency practitioner will prepare a formal proposal for creditors. This outlines the company’s financial situation, total unsecured debts, proposed monthly contributions, repayment terms and future business forecasts. It’s crucial for the proposal to be realistic and achievable, and demonstrate how the business will generate sufficient funds to meet its obligations. Creditors must have full confidence in the financial information provided.
3. Creditor Consultation & Notification
The completed proposal is circulated to all unsecured creditors, who must receive sufficient notice before the decision procedure or creditors’ meeting. This allows time for review and questions. In some cases, discussions may take place with key creditors beforehand to address concerns. Certain companies can also use a moratorium, where they have legal protection from creditor action while the proposal is considered.
4. Creditor Voting
Creditors then vote on the CVA proposal at a formal decision meeting. For the CVA to be approved, at least 75% (by debt value) of voting unsecured creditors must support it. While directors and shareholders can also vote where relevant, creditor votes take precedence.
5. Approval and Repayment
Once approved, the CVA becomes legally binding for all unsecured creditors, including those who voted against it. The company continues to trade under the control of its directors and begins making the agreed monthly payments to the licensed insolvency practitioner. They will distribute funds to creditors and monitor compliance throughout the CVA term.
What Are the Directors’ Responsibilities During a CVA?
One of the key advantages of a CVA process is that the directors remain in control of the business. However, they must take on heightened legal and financial responsibilities to ensure the arrangement succeeds.
Key responsibilities of the directors during a CVA include:
- Maintain ongoing trading operations – directors must continue running the company responsibly, focusing on stabilising and improving performance
- Make agreed CVA payments – monthly contributions must be paid on time to the appointed IP, who acts as supervisor
- Provide accurate financial information – directors must supply regular management accounts, cash flow forecasts and any information requested by the IP
- Comply with the CVA terms – the company must adhere strictly to the agreed CVA proposal, including any restrictions or conditions
- Avoid further creditor prejudice – directors must not worsen the position of the creditors, take excessive risks or allow new unsustainable debts to accumulate
Non-compliance of these responsibilities can lead to the CVA procedures failing and potentially result in liquidation.
What Happens After the CVA Ends?
After the CVA repayment period has finished, on average around three to five years, all relevant unsecured debts are written off, and the business is handed back. The company can continue to trade and operate.
If the creditors fail to agree to the CVA proposal, or the business fails to comply with the agreement, insolvency actions, such as Creditors Voluntary Liquidation or Administration, are likely to happen. Both of these alternatives will result in either the business being sold or shut down completely.
Looking for Professional Guidance? Speak To Our Friendly Team Today!
Griffin & King is a licensed insolvency practitioner that can act as your Supervisor during a Company Voluntary Arrangement procedure. Our authorised advice has helped countless businesses over decades of service manage their finances and pay off all debts successfully. Give us a call on 01922 722 205 for a free consultation to discuss your needs. You can also reach us by sending your details to enquiries@griffinandking.co.uk.
