Company Voluntary Arrangements
What is Company Voluntary Arrangement?
UK Insolvency Law allows an insolvent company or a company with debt issues to enter into a Company Voluntary Arrangement (CVA) with its creditors regarding repayment of full or a part of its debts over a mutually agreed period of time. When a company is bankrupt or on its verge, it is the creditors whose money is on stake so this arrangement can only be implemented by an insolvency practitioner who will draft a proposal for the creditors followed by the meeting with the creditors to check if the terms of the proposal i.e. CVA is accepted by them. In case, the proposal gets 75% of votes from the creditors, it is considered to be accepted by all of them and the current legal action against the company, if any, ceases till the time period mentioned in the proposal. Normally, the time period in CVA is anywhere between 1 to 5 years. Once a company enters into a Company Voluntary Arrangement with the creditors, Companies House need to be informed about the same who will register or make a note of this on their credits file.
In case you are not a limited company and are a sole trader or self-employed, then you have to apply for an Individual Voluntary Arrangement (IVA).
What is the Process of Company Voluntary Arrangement (CVA)?
To enter into a Company Voluntary Arrangement, it is imperative to have the agreement of the creditors. So the steps to enter into a Company Voluntary Arrangement are as mentioned below:
- A CVA can be formed and proposed only by an insolvency practitioner so it is important and the very first step.
- Once the insolvency practitioner is contacted, he needs to be given a thorough and necessary understanding of company affairs.
- The timescale from initial contact with an Insolvency Practitioner to the agreement of a Company Voluntary Agreement is usually six to eight weeks.
- Insolvency practitioner will start drafting the written proposal for the arrangement. In order for him to do come up with an effective proposal, he needs to understand the company affairs i.e. the detailed review of the company, its liabilities and assets, creditors and total money owed to them and then draft an arrangement which is a solution for the creditors as well as the business.
- The draft, once reviewed by the Directors of the company in picture, the Insolvency Practitioner will write to the creditors inviting them for the creditors meeting. Company directors may agree to the terms of the arrangements or request amendments. However, even if there are any amendments or suggestions from the Directors side, it is the Insolvency Practitioner who needs to be satisfied that the arrangement has a fair chance of success to be approved by the creditors.
- The idea behind creditors meeting is to understand the concerns, if any, of the creditors and to cast their votes in favour or against the proposed draft of the Company Voluntary Arrangement.
- It is always better if the creditors are present in the meeting in person. However, if they are not able to do so, they can cast their vote either by email or post.
- Directors of the company are not obligated to attend the creditors meeting.
- At least, 75% of the creditors agree (by value of debt) to the proposal for it to be sanctioned. In case, the vote is lesser than the 75% of the creditors (by value of debt), the proposal will not be approved.
- Apart from this common meeting for the creditors, there will be a separate meeting for the connected creditors such as employees or directors and at least 50% of the connected creditors (by value of debt) need to agree for the draft to be approved.
- Once voting is done and proposal is approved, the creditors are then legally bound to accept the terms of the agreement-including those who have not attended the meeting and those who did not vote.
- Company Voluntary Arrangement might have an arrangement where the directors agree on repayment of corporate debts in a specified period of time or they might have to sell company assets and repay the creditors. Whichever agreement is put in place, once approved, all involved parties have to adhere to the terms and conditions set out.
- For a CVA to be approved by the creditors, they need to be reassured that they will get their money back, at least major chunk of it, if not all of it. And to assure this, the terms of the proposal need to be realistic i.e. the company should be able to afford the terms and conditions of the payment from their monthly income.
- It is imperative of the Insolvency Practitioner to be present in the meeting.
- Once the proposal is approved by the creditors, Insolvency Practitioner has to issue a report to the court and all the creditors within four working days. The report should list down the outcome of each meeting and vote i.e. who was there and the results of each vote.
- The effective date of Company Voluntary Agreement is from the date of the creditors meeting and from that date, they cannot take any action against the directors of the company, unless there is a default of any kind like missed payment dates. In this case, compulsory liquidation of the company becomes only possible solution.
- So, as an Insolvency Practitioner, it becomes even more important to model the payment structure in a manner which is feasible for the directors to adhere to.
Usually, even if the creditors’ money is at risk, they are more than willing to support Company Voluntary Agreement even though the chances of recovering their full amount is not very bright, as opposed to the alternative measures like company liquidation.
What is the Advantages of Company Voluntary Arrangement (CVA)?
In case your business is facing cash crunch and facing threats from the creditors and risk of forced liquidation is quite likely, entering into a Company Voluntary Agreement with the creditors is the best solution which not only give you time to deal with the problem but also loosen up the pressure from the creditors and thus might help in reviving your business.
Company Voluntary Agreement (CVA) has various other advantages, such as:
- Once you enter into a Company Voluntary Agreement with your creditors, they are legally bound with the terms and conditions of the agreement and thus it offers you protection from their threatening demands.
- You get a structured repayment model and thus you can plan better.
- Company Voluntary Agreement is much cheaper than any other insolvency solutions, primarily because they do not involve court, expect when it is challenged. Usually cost of CVA range from £5,000 to £10,000, however it varies from case to case.
- In case you are quick enough to enter CVA with your creditors, you can prevent the winding-up petition from taking effect.
- CVA also ensures creditors and provides reassurance to them that some, if not all of their money will be repaid in a stipulated period of time.
- In case, the company manages to adhere to all terms and conditions, creditors might decide to continue trading with the company, however on different terms and conditions.
- Company Voluntary Arrangement can quickly improve the cash inflow and thus add to your working capital.
- CVA is an arrangement which is agreed by the creditors and thus it prevent them to opt for a legal course of action and thus the company situation is not advertised in public.
- It also provides you an opportunity to bridge the gap between your company and the creditors and thus mend the relations.
- Once you have entered into a Company Voluntary Agreement with your creditors, you can restart trading.
- It gives you an opportunity to restructure your business model in order to start making profit again because you have to ensure that you pay the decided amount to the creditors from your income.
- Once a company restarts trading, directors of the company get an opportunity to maintain the control of the company. Within a Company Voluntary Agreement, it’s the directors of the company who retain the control of the business because no one knows the business and its details better than them. However, they, as the Directors of the company, they have a legal duty to act properly and to prioritize the interests of the creditors. Under a CVA, directors are not personally responsible/liable for the company’s debts, unless they have given a personal guarantee.
- Company Voluntary Agreement allows your company to terminate property lease obligations, supply contracts etc with absolutely nil cost. It also allows you to terminate directors/managers contracts, employment leases, property lease obligations, vacate the premises at nil cost and also helps in reducing the pressure from tax such as VAT and PAYE while CVA is being prepared.
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