A Company Voluntary Arrangement, commonly known as a CVA, is a formal agreement between a company and its creditors to pay back a portion of its debts over time. This is a viable option for businesses facing financial difficulties, allowing them to restructure their debt and potentially avoid liquidation.
Is Your Company Eligible for a CVA?
Eligibility for a Company Voluntary Arrangement requires careful consideration of several factors:
Viable Business Model: The core requirement is a business model that, despite current challenges, shows potential for recovery. This involves assessing the business’s market position, its products or services’ viability, and the potential for operational and financial restructuring to return to profitability.
Creditors’ Approval: A critical aspect is securing approval from 75% (by debt value) of the creditors who vote on the CVA proposal. This indicates that a significant majority of creditors believe in the feasibility of the repayment plan and are willing to support the company’s efforts to avoid liquidation.
Status of Liquidation: The company must not be in the process of liquidation. A CVA is a tool for preventing liquidation, so it’s crucial that the company initiates this process before crossing the point of no return into liquidation.
Company Voluntary Arrangement Process
To initiate a CVA, your first step is to contact an insolvency practitioner (IP). The IP evaluates your company’s situation to determine if a CVA is the most suitable solution for both the company and its creditors. This assessment is crucial in ensuring that the CVA aligns with the company’s capabilities and creditors’ interests.
Step 1
Appointment of Professionals
Initially, a turnaround practitioner or insolvency practitioner is appointed. This expert, along with advisors, collaborates with the company’s director to start the CVA process. Their role is pivotal in ensuring that the proposal is developed correctly.
Step 2
Preparing the CVA Proposal
The appointed professionals work closely with the director to prepare a CVA proposal. This document is crucial and must be comprehensive, fair, and feasible.
It should include detailed financial forecasts, providing a clear picture of how the company plans to manage its debts and return to profitability. During this phase, the company continues to operate as usual.
Step 3
Engaging with Secured Creditors
Before finalizing the proposal, it’s essential to discuss it with secured creditors. The proposal needs to demonstrate how the CVA will serve the best interests of creditors, ensuring maximum debt recovery. It’s a collaborative effort to agree on the terms of debt repayment and the structure of the arrangement.
Step 4
Filing the Proposal at Court
Once the proposal is finalized, it’s filed at court. This formal step is crucial for legal validity. After court filing, the proposal is printed and sent to all creditors, initiating the formal consideration phase.
Step 5
Creditors Review Period
Creditors are given a minimum of 17 days to review the CVA proposal. This period is vital for creditors to assess the viability and fairness of the proposed terms. It allows them to make an informed decision on whether to support the CVA.
Step 6
Creditors Meeting and Voting
A meeting of creditors is then convened. Here, creditors vote on the proposal, which can also be done by proxy. To approve the CVA, at least 75% (by value) of voting creditors must be in favor. This majority approval is essential for the CVA to proceed.
Step 7
Implementation and Supervision
Once approved, the CVA comes into effect under the supervision of the CVA supervisor. This supervisor is responsible for overseeing the monthly collection of payments from the company, which are then distributed to creditors, typically on an annual basis.
Questions & Answers about Company Voluntary Arrangement
Here are some frequently asked questions that will help you understand the CVA process.
Who Gets Paid First in a CVA?
The payment hierarchy in a CVA is structured to ensure fair and orderly debt management:
- 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.
- 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.
- 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.
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