Company Voluntary Arrangement Downside in Downside

Company Voluntary Arrangements or CVAs, as they are also known, are one of the ways in which a limited company, which is classed as insolvent, can pay back their debts to creditors over a fixed period of time.  Insolvency is when a company is unable to pay back their debts as they fall due or if they do not have enough assets to cover its debts, for example, if the value of assets falls less than the amount of liabilities. 

If you think this may apply to you and your company, don’t fret, we can definitely help. If your company is deemed insolvent, then the director no longer has a primary responsibility towards the care of its shareholders but its creditors instead.  It is similar to bankruptcy, but bankruptcy is the term used only for personal debt, whereas insolvency is the terminology used for business debt.

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Many companies across the UK find themselves insolvent and every circumstance of insolvency is different to the next.  That is why there are several ways that directors can consider to ensure that the matter is best resolved.  It is recommended that companies seek sound advice to ensure that the best solution is chosen, and this should be chosen sooner rather than later. 

There are in fact four different procedures to consider if you feel as though your organisation is heading towards insolvency that may help rescue the situation before it gets bad.  These include Administration, Administrative Receivership, Liquidation and finally, as discussed below, Company Voluntary Arrangements.   This is one of the lesser known insolvency procedures available for businesses.

What is a Company Voluntary Arrangement?

A Company Voluntary Arrangement is an agreement with your company’s creditors to allow more time to pay back debts. This is a legally binding agreement as it stands and 75% of creditors, by value, must support the proposal, otherwise it will not be approved. 

After the proposal has been approved by all involved, any unsecured creditors are bound to it and your limited company can continue trading, even those creditors that did not vote (by choice or no notice) have to act within this arrangement.   Therefore, no unsecured creditors are able to take legal action against your organisation outside the CVA.

It is certainly one of the most flexible insolvency methods available as, apart from the procedure and content of your proposal, which are both dictated by law, the rest of this arrangement is determined by the company, with the hope that the creditors will agree to it. 

Unlike other procedures which may be considered, this has no effect on employee contracts so jobs can be saved, unless redundancies are a necessary part of the procedure, for example, during a restructure.

The arrangement will usually last over a period of 3-5 years and is closely monitored by a licensed insolvency practitioner who acts as a supervisor to the arrangement.  The time agreed on will help the business to repay all or some of its debts whilst still trading and remaining under the management of its own directors. 

How Much Does a CVA Cost?

A CVA can only be granted through an insolvency practitioner who not only charge for the application process but also the administration process.  It is difficult to say exactly how much the Company Voluntary Arrangement will cost as each case is unique and varies depending on total number of creditors, employees, position of the bank and what level of negotiation is needed. 

There are many people involved within the arrangement, and that does mean that a lot of communication needs to take place between not only to the company and its creditors but also the company’s stakeholders.  Like many other insolvency procedures, the sooner the ball is rolling the easier, and cheaper, the case can be to handle.  Professional insolvency practitioners can give you an idea of cost once they fully understand your company’s financial position.

Pros and Cons of a Company Voluntary Arrangement

Pros

·         Can improve cash flow within a short amount of time

·         Pressure from tax, VAT and PAYE is lifted whilst the agreement is being prepared

·         Company remains operational as a separate legal entity and managed by its existing team

·         Business contracts, accreditations and licenses are likely to be unaffected

Cons

·         It is possible that there may be disagreements over the proposed CVA between directors.

·         If a single creditor makes up a large percentage of the company’s debt, then they have a strong position to negotiate deals on their terms

·         It will have a negative effect on company’s credit rating and obtaining future credit may be an issue well after the arrangement has ended.

·         The arrangement does not legally bind secured lenders, so they can still take legal action.

CVA Process in the UK

The application process for a CVA in the UK can only begin if all the directors or members agree and this must be done with an insolvency practitioner.  The insolvency practitioner will then start to work out a plan and arrangement as to how much debt the company can pay back and a payment schedule to ensure this is achieved.  This must be completed within a month of being appointed to supervise the CVA.

One the arrangement has been written up, the insolvency practitioner will write to all creditors and provide necessary information and invite them to vote on it.  As mentioned earlier, for the Company Voluntary Arrangement in Downside to be granted, it must be approved by creditors who are owed at least 75% of the debt.  If this cannot be achieved, then the company may face voluntary liquidation, whereby its assets are used to pay off its debts, the business will stop trading and will be removed from the companies register at Companies House.

If the voting is successful and works in the company’s favour, then the scheduled payments must be made to the creditors via the insolvency practitioner over a set amount of time and until the agreed amount is paid off.

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