What is a CVA (Company Voluntary Arrangement)?

What is a company voluntary arrangement (CVA) and how can it help an insolvent business get back on track? This guide takes an in-depth look at CVAs, how they work and the benefits for businesses in financial difficulty.

What is a CVA in business?

A CVA is a legally binding debt repayment deal between an insolvent business and its creditors. When a company falls into financial hardship, a Company Voluntary Arrangement can offer a lifeline.

It is designed to help companies who have fallen behind with payments or have cash flow problems. A debt repayment plan is put in place to ensure creditors receive some of what they are owed and the business is able to continue trading. Debts are repaid from future profits over a period set out in the arrangement.

Company Voluntary Arrangement (CVA)

A Company Voluntary Arrangement (CVA) is an opportunity for a firm to re-evaluate, restructure and find ways to become more profitable. In addition, directors can stay in control of the business going forward.

When a company enters into a CVA, it is not publicly announced in The Gazette (the official public record). This can help avoid any of the negative publicity usually associated with companies facing financial problems. Details of the company’s CVA will however be available at Companies House.

A Company Voluntary Arrangement can be pursued at any time, even if a business is under threat of a winding up order. They will need to act quickly, but it can help the firm avoid legal action.

To summarise: a CVA is a legal arrangement between a struggling business and its creditors. The arrangement ensures creditors are paid back at least some of what they are owed. The business is able to continue trading, its directors remain in control, and damage to the company’s reputation can be avoided.

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What is the CVA process?

The following outlines the process of a CVA:

  • An insolvency practitioner is hired to help directors decide if a CVA is the best course of action.
  • If a CVA is considered the best option, the insolvency practitioners will put together documentation, including a realistic and fair CVA proposal. A typical proposal would outline why the CVA is a good option for the creditors and how the company will make their repayments. It may also include details of the company restructuring plans or sales strategy.
  • When the proposal is complete and approved by directors it is sent to creditors for consideration.
  • At a meeting several weeks later, creditors vote to approve or reject the approval (they can do this in person or in writing).
  • For the Company Voluntary Arrangement to be approved, at least 75% of creditors who vote must vote in favour of it.
  • When approved, a supervisor of the CVA is appointed. They are in charge of collecting CVA contributions to distribute to creditors. They will also form annual reports for creditors and manage any changes to the CVA.
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How long does it take?

On average, putting a CVA in place takes between 6 and 8 weeks. Four weeks to hire an insolvency practitioner, draft the proposal and send it to creditors, then 3 weeks for creditors to consider the proposal and take a vote.

The maximum term of the CVA itself is five years, though a three year term is often sought. The timeline will depend on the circumstances of the CVA and the financial capabilities of the company.

How much does a CVA cost?

There is no set cost for a CVA – it varies by company. It is dependent on the number of creditors and how much negotiation is required. If there are complications or a short timeline (perhaps to avoid a winding up order) this may lead to a more costly process.

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What are the advantages of a Company Voluntary Arrangement?

We have already seen how a CVA can help a company survive financial difficulty. But there are many other benefits too. Some of the key advantages are:

  • It protects the company from winding up petitions and other legal action.
  • Creditors receive most (or all) of their money back. Creditors will often receive more than they would if they company were to go into administration or liquidation instead.
  • It immediately improves company cash flow as affordable payments are agreed.
  • It allows the company a chance to reorganise or restructure.
  • It is not publicly advertised so the company’s reputation is protected.
  • Directors are able to remain in charge.
  • It is often less expensive than other insolvency procedures.

A company in financial difficulty is not an immediate write-off. A Company Voluntary Arrangement can save it from total collapse by reducing the pressure of debts, improving cash flow and allowing the company some breathing space to make changes. It is often the right choice for companies and creditors as lenders receive what they are owed and the business returns to financial health.

The content of this article was correct at time of publication.

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Successful CVAs

A successful Company Voluntary Arrangement will result in the company coming out the other side debt free, but it cannot be entered in to lightly. A CVA usually lasts for around 3 to 5 years, during which time the directors of the company will be working hard to pay for what is currently due and the debts that have built up. It is therefore important that the directors have a desire to save the company, without this the Company Voluntary Arrangement simply will not work.

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