Company Voluntary Arrangement

A Company Voluntary Arrangement (CVA) is one of the Insolvency sectors buzzwords at the moment following on from the notable cases of big name retailers.

This year has already seen a number of Company Voluntary Arrangements proposed by large retailers such as Debenhams, Paperchase and Giraffe restaurants, but why are these companies seeking a CVA and what are the implications of doing so?

What is a CVA?

A Company Voluntary Arrangement (CVA)  is an option available to all limited companies as an Insolvency procedure and is used when a company still has a viable business but is struggling with liabilities such as high rents or large debts.

A CVA is deemed as a recovery option and allows the company to continue trading whilst coming to an agreement with its creditors to repay some or all of its debts. The creditors will attempt to negotiate the best possible settlement, based on the ongoing cash generation of the underlying business.  With settlements ranging from accepting just 20% of what they are owed to almost 100% but perhaps on better terms or paid over a longer duration.

The CVA gives the company protection from its creditors for a period to enable it to pay them back the agreed amount. Normally it is fixed for a number of years  unless the company defaults on the payments. Although many companies will seek to settle the debts faster if they can in order to remove the CVA. It all depends on the cash flow of the business and what excess cash it can generate from future trading.

How can a company propose a Company Voluntary Arrangement?

The directors will normally approach an Insolvency Practitioner and prepare a proposal to be sent to creditors with the Insolvency Practitioner acting as Nominee. The directors must include a statement as to why they believe an arrangement is desirable and the reasons the creditors should want to agree to it.

The proposal will include:

  • Details of the Assets and Liabilities of the company
  • Any transactions which would otherwise be investigated in Liquidation
  • The proposed duration of the arrangement
  • Dates of expected dividends to creditors
  • How the business will be managed during the arrangement
  • The changes that are proposed to be made to the business, or any changes that have already been made to enable the business to become profitable and cash generative once again

The Nominee files in Court their comments on the proposal, that it is:

  • Fit for purpose
  • Fair to all creditors
  • Has a good chance of being accepted

A meeting of the creditors will be called for no more than 28 days from filing the proposal in court but a minimum of 14 days notice to creditors of the meeting.

In the period between sending notice to the creditors and holding the meeting, the Nominee will be in contact with the creditors to seek their comments on the proposal. Creditors will vote either before the meeting or at the meeting and can either accept the proposal terms, reject the proposal terms or accept the terms with modifications.

The resolution to agree the proposals for the Company Voluntary Arrangement will require 75% of those creditors present and voting on the day. Therefore, it is important to hold initial discussions with key creditors at the outset to see if they are willing to consider a CVA.

Once agreed the shareholders will then hold a meeting immediately after to consider the proposals. This resolution requires more than 50% of the shareholders.

Advantages of a CVA

A CVA is the preferred route of insolvencies for struggling companies because it both enables the business to continue trading and allows the company directors retains control.

The company can also avoid mass redundancies, employees retain their jobs and the company can continue to benefit from the experience of the staff members.

There is also no formal investigation into the conduct of the directors under a CVA as there would be in Liquidation into such matters as; preferences, transactions at undervalue, misfeasance of the directors and transactions defrauding creditors.

Disadvantages of a CVA

There are a few disadvantages of a CVA, the main one being that should the arrangement fail the creditors will require the company to be wound up via the court. There will be funds held by the Insolvency Practitioner to enable this to be done.

Creditors will also usually require the directors to limit their income and for the company to not pay dividends to shareholders during the period of the CVA.

The Impact on enforcement

If the business is not currently in liquidation, in a CVA or has not had a winding up petition issued against it, and meets the small company criteria which is:

  • Turnover – Not more than £10.2 million
  • Balance sheet total – Not more than 5.1 million
  • No more than 50 employees

They can apply for a Small Company Moratorium via the courts which means that:

  • No winding up petition can be presented
  • No Administration Order can be presented
  • No Administrative Receiver can be appointed
  • Landlords cannot exercise their rights of forfeiture
  • No further steps can be taken to enforce any security or repossesses any goods under a HP agreement
  • Company meeting cannot be called without the consent of the Nominee of leave of the court.

However, should the company not file for a moratorium then creditors are free to continue action against the company up until the date that the CVA is accepted by creditors.

Should the agreement be accepted by the requisite majority of creditors then all creditors will be bound by the terms of the arrangement and therefore cannot continue their action.

A CVA is thus an extremely powerful procedure and used correctly can save a business, however, as it generally is a 5-year term, it is of upmost importance to seek advice early and to ensure that the CVA is affordable and that the company is able to meet its monthly payments for the full period.