What is a Company Voluntary Arrangement?
A Company Voluntary Arrangement (CVA) is a contract between the company and its creditors which redraws the company’s debt obligations. By acknowledging the company is insolvent, and that liquidation is a real prospect, an offer to agree a CVA can be made to creditors. The CVA offer sets out why creditors will receive a better return though a CVA than they would receive if the company were to be wound up. By comparing the CVA outcome against a costlier liquidation, most creditors will agree to a CVA even though the company may repay only a proportion of the sums owed and over a longer period.
The terms of a CVA are entirely flexible and can be drawn up to fit the circumstances the company. In some CVAs the company will be able to pay its debts in full in less than five years. In other cases, the company will be bound to make contributions over five years but will only repay a proportion the overall debt. The flexibility of a CVA allows a company to restructure and offer contributions from the enhanced profits. A CVA can also break or vary onerous lease agreements and terminate employment contracts, with compensation claims falling as creditors in the CVA and employees able make claims against the Government for arrears and redundancy.
As with all cases of trading difficulties, the first step is always to review the company’s financial health and assess all of the options. Whiteoak Morris offer free and confidential professional advice to clients across Cardiff, Newport and surrounding areas. The sooner advice is sought, the more likely it is that a rescue can be successfully implemented. Only a licensed Insolvency Practitioner can act as nominee and supervisor of a CVA.
What are the advantages of a Company Voluntary Arrangement?
- The directors of the company remain in control.
- The terms of the CVA offered to creditors are flexible and will be tailored to the company’s circumstances, to ensure the contributions are sustainable.
- It is a relatively low cost procedure. Our Insolvency Practitioner’s fees are generally drawn as a proportion of the monthly contributions paid by the company, rather than paid as an additional cost.
- The CVA is not advertised and the company is not required to inform prospective clients, suppliers or third parties of the existence of the CVA before doing business with them.
- A CVA allows a business to restructure to profitability, reduce monthly debt repayments, and trade its way out of difficulty whilst protected against legal actions by individual creditors.
- Interest on the debts freezes at the date the company enters the CVA.
- CVA contributions are defined at the outset, both in terms of the size of the contribution and the duration of the arrangement, allowing for successful business planning going forward.
- A CVA must be agreed by 75% in value of the voting creditors bound by it, meaning it can be used to bind minor creditors that may vote against.
- A report is not issued on the conduct of the directors concerning their fitness to act as a director in future.
How does a Company Voluntary Arrangement work?
Whiteoak Morris receive the company’s contributions, liaise with the creditors and distributes payments to them. This provides the directors with a breathing space to focus on the underlying business. The directors retain control of the company during the life of the CVA and they are not required to disclose the fact of the CVA to prospective clients or suppliers. From the date the company enters the CVA the interest payments on debts freeze and creditors cannot take legal action for debt recovery or petition for the winding up of the company.
When considering a CVA the company receives professional advice to review the business and assess whether a CVA may also provide an opportunity to restructure the company to enhance profitability. Our Insolvency Practitioner presents the CVA proposal to creditors and, if it as agreed, supervises the implementation of the arrangement. If the company’s circumstances change during the life of the CVA the creditors can be approached to vary the terms of the agreement. Providing the company meets its obligations under the CVA the directors can focus on the business and bring a profitable company out of the CVA on completion.
What type of company would a Company Voluntary Arrangement be appropriate for?
A CVA may be appropriate for any company that is struggling to meet debt obligations, yet has a sound underlying business which the owners wish to continue. Typically, the company may have suffered a difficult patch of trading, been unable to recover book debts, been affected by a change in the marketplace or one of many other reasons why an underlying profitable business may accumulate debts. Whiteoak Morris arrange and implement CVAs for small and medium sized companies across Cardiff, Newport and surrounding areas.
What happens to the existing accountant – client relationship?
If the company has any outstanding accounts or returns, the existing accountant will be paid to bring them up to date. The accountant can continue to provide services to the company during the life of the CVA and the business planning will make provision for these accountancy fees. If the company successfully completes the CVA the accountant can retain the client going forward.
What are the first steps a company should take when facing trading difficulties?
It is important for company directors to take advice as soon as a potential difficulty is recognised. The earlier the problems are faced the more likely it is the company can be rescued. Whiteoak Morris work with small to medium sized companies across Cardiff, Newport and surrounding areas. We provide free and confidential advice to directors, accountants and business advisers concerning companies facing trading difficulties. We are a highly regulated profession and you can be assured we will act in the best interests of the company and its owners.
We also advise directors on their duties and responsibilities when a company is insolvent. This is an important time for directors because their responsibilities shift from the interests of the company to protecting the interests of creditors. If directors fail to act properly they may be required to contribute from personal funds or face disqualification should the company enter liquidation. This is an extensive and technical area and professional advice should be sought.