What is Company Voluntary Arrangement (CVA)?

Who Gets Paid First in a CVA?

The payment hierarchy in a CVA is structured to ensure fair and orderly debt management:

1. Secured Creditors: These are creditors who have a charge over some assets of the company. They are prioritized in the repayment plan because their loans are backed by collateral, meaning they bear a lower risk.
2. CVA Expenses: The costs incurred in setting up and administering the CVA are also prioritized. These include fees for the insolvency practitioner and legal costs.
3. Unsecured Creditors: After secured creditors and CVA-related expenses, unsecured creditors are next in line. These creditors do not have collateral backing their loans and hence are at a higher risk. The CVA aims to offer them a better return than they would receive in a liquidation scenario.

Benefits of a Company Voluntary Arrangement (CVA)

• Continuity of Trading: A CVA allows businesses to continue operating, maintaining revenue and preserving important relationships, which is critical for recovery and growth.
• Legal Protection: It offers legal immunity against creditors’ actions for debt recovery, providing the company with space to reorganize and stabilize without external pressures.
• Control Retention: Directors retain control of the business in a CVA, unlike in liquidation, enabling them to utilize their in-depth knowledge for effective turnaround strategies.
• Debt Restructuring: CVAs consolidate debts into a single, manageable plan with potentially reduced repayments, easing cash flow and allowing investment in vital areas for business revival.

What Does a CVA Proposal Contain?

A comprehensive and well-structured CVA proposal is key to gaining the confidence of creditors:

• Detailed Repayment Plan: This outlines how the company plans to repay its debts. It includes payment schedules, amounts, and the duration of the CVA. The plan should be realistic and achievable, based on a thorough financial analysis.
• Financial Statements and Forecasts: Current financial statements and future financial forecasts provide a clear picture of the company’s financial health. This transparency is vital for creditors to assess the feasibility of the CVA.
• Benefits to Creditors: The proposal must clearly explain why a CVA is a better option for creditors compared to liquidation. This typically involves demonstrating that creditors are likely to receive a higher repayment through the CVA than they would if the company were to be liquidated.

How Much Does a CVA Cost?

The cost of proposing a Company Voluntary Arrangement (CVA) can vary significantly, primarily based on the complexity of the company’s financial situation and the specific requirements of the case. Key factors influencing the cost include:

• Insolvency Practitioner’s Fees: The insolvency practitioner (IP) plays a critical role in the CVA process, from assessing the viability of the proposal to managing the arrangement once it’s in place. The fees for their services can vary based on the case’s complexity, the IP’s experience, and the firm’s reputation.
• Legal and Advisory Costs: Depending on the situation, there may be legal fees involved, especially if there is a need for legal advice or representation. Additionally, advisory fees for financial consultants or accountants may be incurred.
• Administrative Expenses: These include costs associated with preparing and distributing the CVA proposal, meeting arrangements, and communication with creditors.

It’s important to note that these costs are typically included in the CVA proposal itself, meaning they are part of the overall repayment plan agreed upon by the creditors.

Can Companies Still Trade After CVA?

Yes, companies can continue trading during a CVA. This is one of the key advantages, allowing businesses to generate revenue and recover financially. This aspect is crucial for several reasons:

• Revenue Generation: Continuing operations means the company can generate income, which is vital for meeting the obligations set out in the CVA repayment plan.
• Preserving Value: By keeping the business operational, its value as a going concern is maintained, which is beneficial for both the company and its creditors.
• Employee Retention: Continuation of trade helps in retaining employees and maintaining business relationships, essential for long-term recovery and sustainability.
• Building Confidence: Successful trading during a CVA can also help rebuild confidence among suppliers, customers, and investors, crucial for the company’s future.

When Can a CVA Be Proposed?

A CVA can be proposed under specific circumstances, primarily when a company is facing financial distress:

• Insolvency or Contingent Insolvency: This is when a company cannot pay its debts as they fall due or when its liabilities exceed its assets. A CVA is often proposed as an alternative to liquidation in such scenarios.
• Prospects of Rescue: The proposal for a CVA is contingent on the belief that there is a reasonable prospect of the business being rescued. This means there needs to be a viable business plan in place that shows how the company can return to profitability and solvency.
• Early Intervention: It’s crucial to propose a CVA early in the process of financial difficulty. The earlier a CVA is proposed and implemented, the greater the chance of a successful turnaround.