If a company has a viable future, the directors accept the need for change, are prepared to fight for its survival and appropriate funding can be found, then a company voluntary arrangement (CVA), also known as a creditors voluntary arrangement can be a powerful business turnaround tool. With a CVA, you can avoid liquidation and instead focus on paying your creditors what you can afford out of future profits.
What is a Company Voluntary Arrangement CVA?
A company voluntary arrangement is a company rescue and restructuring solution used right across the UK which can help to ensure the survival of your business. It is a formal arrangement between a company and its creditors that highlights whilst at present the company cannot pay its debts, it will be able to out of future profits. Your business will then pay towards its debts for an agreed period of time and once completed, all remaining debts will be written off.
What makes a successful CVA?
For a Company Voluntary Arrangement to succeed, there are a number of vital components such as:
- A viable business that can return to profitability
- Commercially structured so the business can succeed without over promising creditors
- The introduction of appropriate levels of working capital
- The restructuring of debt
- Acceptance of the management team that change is necessary
- Determination and hard work throughout the duration of the CVA
- Cautious and realistic forecasting
- Using an experienced insolvency practitioner
- A clear plan to stabilise and improve cash flow throughout the CVA period
Who can propose a CVA?
A company voluntary arrangement can be proposed by the directors of the company, or, if a company is in administration, by the administrator. A CVA can also only be proposed if a company is insolvent or contingently insolvent.
Why propose a CVA?
It is important to point out that a CVA is not a panacea for your company; rather it is a very powerful framework for change. In reality, although it can be difficult to propose a CVA and get it approved, it’s actually the easiest part of the turnaround process. Making a business turnaround work is much more difficult and will most likely need professional help.
With the above in mind, a company voluntary arrangement should aim to:
- Maximise creditors’ interests
- Preserve distressed but viable businesses
- Preserve economic activity and save jobs
- Return value to the creditors in time
- Provide a real prospect of return for shareholders
What Are the Disadvantages of a CVA?
While a Company Voluntary Arrangement can be a highly effective business rescue tool, it’s important to be aware of the potential drawbacks before proceeding. Every situation is different, and understanding the risks will help you make an informed decision.
- Entering into a CVA will be recorded on the company’s credit file, which may affect your ability to obtain credit or finance in the future.
- While a CVA is not made public in the same way as liquidation, news can still reach suppliers, customers and other stakeholders, potentially impacting confidence and trading relationships.
- The CVA proposal must be approved by at least 75% (by value) of voting creditors. If key creditors such as HMRC are not supportive, the proposal may be rejected.
- If your company misses scheduled payments or fails to comply with the agreed terms, the CVA can be terminated. This typically leads to liquidation or administration.
- A CVA cannot change the rights of secured creditors without their consent. This means any significant secured debts must be handled separately, which may limit the CVA’s effectiveness.
- A CVA generally runs for several years and requires consistent contributions. This long-term financial commitment can place pressure on the business, particularly if cash flow remains tight.
Despite these potential disadvantages, many businesses find that the benefits of a CVA outweigh the risks, particularly when supported by experienced insolvency practitioners like McAlister & Co.
How to draft a CVA proposal
The process of drafting a CVA proposal is as follows:
- The directors appoint advisers such as turnaround practitioners or an insolvency practitioner to assist with the construction of the proposal. During this hiatus period, the company should not materially increase or decrease debts to any creditor: suppliers should be paid for supplies made and the activity of the company should continue.
- A review of the company, its people, markets and systems should be undertaken. This is an important part of the process because a CVA will typically include detailed three to five year financial forecasts to assist the creditors to make their decision as to whether they will support the deal or not.
- Once the draft proposal is ready, the directors will typically review and refine it and agree that the proposal is appropriate, achievable and maximises creditors’ interests. If the directors do not believe that it is sensibly structured, or that the process has highlighted weakness in the business, then it is advisable to close the business.
- Once the final CVA drafting has been completed, the directors should then discuss the position with the company’s secured creditors. The ability to deliver a quality draft proposal at this stage is preferable to verbal assurances that a CVA will be written – we find that the banks are very keen to get involved and assist where they see a viable company. Often, they will want to see how the company will repay the bank’s debts, so this should be included in the outline of the document. Of course, the bank may not agree with the suggested secured debt structure, but they will usually negotiate with the directors and their advisers.
- During the CVA production or hiatus period, current assets such as WIP and debtors are collected and turned into cash and liquidity should improve. This should be used to fund the difficult period between the appointment of the CVA advisers and filing the document at Companies House.
- Once the proposal is ratified it is then printed and the proposal is distributed to all creditors. The court does not have an active part to play in this process, however the CVA proposal sent to creditors must be a true signed copy of the document for filing.
After the proposal is completed
Once the proposal is completed, the following steps must be taken:
- The proposal must then be sent to all the creditors who then consider it for the minimum notice period before the creditors decision deadline elapse. We find that the HMRC team, the Combined Voluntary Arrangement Service, prefers to have up to three weeks to consider proposals, so we always allow more than the statutory 14-day minimum period for consideration.
- The creditors meeting will be chaired by the adviser or an insolvency practitioner, with creditors often represented by technical professionals from other insolvency firms. The aim of the meeting is to allow the creditors to question the director’s proposals; however, it is not a place for settling disputes.
- At the meeting the creditors will vote on the proposal and if a majority vote of 75% by value of the total value of creditors at the meeting (whether in person or by proxy) vote in favour, the proposal will be approved. A second vote excluding connected creditors is taken and provided that not more than 50% of creditors vote against the proposal, it is approved. The voting at meetings is often an area that concerns directors. The CVAs, which represents HMRC, will always support viable proposals that are well-built and show proper care and attention to detail. Given that the CVAS often represents the largest votes, we ensure that they are comfortable with the CVA process very early in the cycle of events.
- The Chairman controls the ability to vote providing the creditors have been asked to consider a sensibly structured deal. The creditors may wish to modify the proposal and any modifications need to be approved by the majority votes above. This is often done by HMRC’s agencies to ensure future taxes are paid on time and that the future filing of tax returns is done correctly. Occasionally other creditors may ask for a modification to the proposal too.
- At the same time as the creditors meeting, the members meeting is held. Members decide whether to accept the proposal as made or modified, and a vote of 50% in favour is required.
- If both meetings approve the proposal, the meetings close. The chairman must then issue a chairman’s report to all creditors and the court within four days, stating what happened, who voted and how they voted.
- Once approved, all notified and included creditors are legally bound for the debt “frozen” in the proposal. No further legal action (except by leave of court) can be taken against the debtor company and the creditors will receive dividends from the supervisor as described in the proposal.
- After the approval, the company must make the agreed contributions to the trust account administered by the supervisor. Failure to keep up with contributions is deemed a default, in which case the company voluntary arrangement can be “aborted”. This usually leads to liquidation or receivership. Even if the CVA process leads to small repayment levels of just 20-50% to unsecured creditors, they usually prefer sensible contributions to hopelessly optimistic forecasts.
To avoid this, the best way to structure the CVA is on the following basis:
- Prudent forecasts of directors should be further scaled back
- Modest forecast profits should be used as the basis for contributions
- No more than 50% of profits after tax and debt repayments over the deal period should be contributed
- Contributions should be stepped to match profits achieved
- Any lump sum contributions during the currency of the CVA should be avoided where possible
- The use of a profits ratchet allows higher repayments if modestly forecasts profits are exceeded
What Happens During the CVA Period?
Provided that the company conforms to the CVA proposal and makes its contributions, the CVA will continue for the agreed period. The supervisor is generally not involved in the business; instead the directors remain in control.
What if things don’t go well?
If the company is not performing well yet it still appears to be viable, it is theoretically possible to reconvene the creditors meeting at any time to ask the creditors to consider amendments. What’s more, if the supervisor has concerns, he can also ask the court for direction. In most cases, the directors should also inform the supervisor if there are any material changes to the company or its business.
How long does the process take?
In practice, a company voluntary arrangement takes about seven to 10 weeks from the drafting of the proposal to the approval.
During this period, the company works closely with an insolvency practitioner to prepare detailed forecasts and agree the terms of the CVA with creditors.
Once approved, the CVA allows the company to continue trading while making affordable, scheduled repayments over an agreed period. The terms of the CVA will outline the contribution amounts, repayment timelines and the responsibilities of both the company and the supervisor.
This structured approach offers a realistic chance of recovery without the need for liquidation, while maintaining business operations and relationships.
How McAlister & Co Can Help With The CVA Process
A CVA is a powerful insolvency procedure that enables you to rescue and restructure your business to ensure it survives. The purpose of a CVA is to give a viable company the breathing space it needs through a legal moratorium on creditor action, allowing time to repay debts and avoid voluntary liquidation.
If your business is facing financial difficulty, it’s essential to act quickly. Financial problems do not always signal the end of your business, and by working with licensed insolvency practitioners, you can explore the most effective route forward and begin turning things around.
At McAlister & Co, we are business rescue experts – so if you find yourself in financial difficulty, facing creditor pressure or a winding up petition, contact our expert team today to discuss your next steps. Alternatively, why not download our guidance notes for directors for more help and advice.
