Hello, there!
Are you grappling with the challenges of keeping your business afloat in tough times? You’re not alone. In the UK, many businesses face financial hurdles that seem overwhelming. But there’s a beacon of hope in the UK’s corporate landscape—the Company Voluntary Arrangement, commonly known as a CVA. This insolvency proceeding offers a practical way to restructure your limited company while struggling to stay afloat.
In this guide, we’ll explore the complexities of CVA, providing you with a clear understanding of how it can be a game-changer for your business in distress. Whether you’re grappling with mounting debts or uncertain about your company’s future, learning about the Company Voluntary Arrangement in the UK could be your first step toward a sustainable turnaround.
Let’s dive in and explore how this process can offer your company a much-needed second chance!
What Is a Company Voluntary Arrangement?
A Company Voluntary Arrangement (CVA) is a formal agreement between a struggling or insolvent business and its lenders, usually lasting 3 to 5 years. It’s a legal arrangement established under the Insolvency Act 1986 to assist companies facing financial difficulties. Unlike administration or liquidation, CVA details aren’t publicly announced in The Gazette but can be accessed through Companies House.
CVAs help businesses that are behind on tax payments, experiencing cash flow issues, or dealing with legal action. By creating a debt repayment plan, the company can gradually repay debts using future profits over an agreed period. This approach allows the business to keep operating and provides the opportunity to restructure, improve business strategies, and potentially write off some debt. Directors can also maintain control of the company, contributing to its continued operation.
Keeping the CVA private is often advantageous for businesses as it preserves their reputation without alarming creditors unnecessarily. However, informing creditors and suppliers beforehand is advisable to maintain trust and continued collaboration.
Company Voluntary Arrangement Examples
Picture this: A marketing agency faces financial challenges due to lost clients and high operational costs. To go on, they took a few loans from the creditors. But they failed again for the same reasons, along with misconceptions, wrong planning, and approaches. As a result, they lost the money, and the level of debt became unmanageable. And the agency became an insolvent one.
Now, the agency proposes a CVA to the outstanding creditors. The proposal outlines plans to make smaller, more manageable repayments to creditors while restructuring its business model to focus on digital marketing.
Following this scheme, the agency adapts to market demands, regains clients, and slowly improves its financial health.
It sounds like a relief, right?
Company Voluntary Arrangement Insolvency Act 1986
According to the Insolvency Act 1986, a CVA is an agreement with creditors supervised by an insolvency practitioner (called the nominee initially, then the supervisor). The agreement becomes binding if most creditors and shareholders approve the proposals at meetings. However, it doesn’t change certain creditors’ rights, like secured creditors, unless they agree to the deal.
The Corporate Insolvency and Governance Act 2020 (CIGA 2020) ended small companies’ optional CVA moratorium on June 26, 2020. Instead, CIGA 2020 introduced a new Part A1 moratorium that is more flexible and lasts longer than the previous moratorium when used with a CVA.
Notice to Registrar of Companies Voluntary Arrangement
A Notice to the Registrar for a UK company’s voluntary arrangement is a formal notification sent to the Registrar of Companies. This notice informs the regulatory body that the company is proposing or has started a voluntary arrangement to manage its debts.
It allows the company to legally arrange to pay off its debts over a set period while continuing its operations. This notice is essential for the company’s legal records and ensures that the Registrar is aware of the arrangements the company makes regarding its debts.
Types of Company Voluntary Arrangement in the UK
There are two different types of CVA:
- A Company Voluntary Arrangement without a moratorium, established by the Insolvency Act 1986, and
- A Company Voluntary Arrangement with a moratorium, established by the Insolvency Act 2000 and effective from January 1, 2003. The moratorium offers directors a powerful tool to handle company distress, as it stops creditors from taking action against the company during this period. This pause in creditor actions allows directors time to plan a way forward, aiming for a better outcome for creditors, employees, and stakeholders than liquidation.
The type of CVA appropriate for a company is determined by its circumstances. For instance, a company sued by its creditors might better apply for a CVA with a moratorium.
Aside from the two main types of CVAs, there are also several other types, such as
- Monthly payment CVAs: In these CVAs, the business agrees to pay its creditors regularly for a predetermined amount of time.
- Lump Sum CVAs: The business gives its creditors a one-time payment in these CVAs.
- Hybrid CVAs: These CVAs incorporate aspects of lump sum and monthly payment CVAs.
Company Voluntary Arrangement Objectives
A Company Voluntary Arrangement, or CVA, is a plan to help an insolvent limited company. The main goals of a CVA are:
- To Save the Company: A CVA tries to keep the company running instead of closing it down.
- To Pay Off Debts Over Time: The company agrees with the people it owes money to (creditors) to pay back some or all of the debt but over a more extended period.
- To Make a Fair Deal: This insolvency proceeding aims to find a balance where the company can afford the payments while creditors get back some of the money they are owed.
- To Protect the Company: While the CVA is in place, creditors can’t take legal action to get their money, giving the company some breathing room.
- To Improve Cash Flow: It helps the company have better control over its money and keep trading.
In short, a CVA is like a structured plan that helps a struggling company get back on its feet by paying off its debts in a manageable way.
Key Features of a Proposed Company Voluntary Arrangement
A Company Voluntary Arrangement has its own characteristics compared to other insolvency proceedings. Here are the key features of a CVA:
- Agreement with Creditors: The company makes a deal with the people it owes money to, where it agrees to pay back some or all of its debts over time.
- Flexible Payments: The company gets to pay back its debts in a way that it can afford, which might be smaller amounts over a longer period.
- Keep Trading: Unlike in liquidation, the company can keep doing business while paying off its debts.
- Control Stays with the Company: The directors stay in charge instead of an outsider taking over.
- Legal Protection: Once a CVA is agreed upon, creditors can’t take legal action to get their money, giving the company some breathing space.
- Help from an Insolvency Practitioner: A qualified insolvency practitioner helps set up the CVA and manage the creditors’ payments.
Eligibility for a Company Voluntary Arrangement Solution
Eligibility for a CVA in the UK depends on specific requirements:
- Facing Insolvency or Probable Insolvency: The business must be in a situation where it can’t pay its debts when they’re due or owe more than it owns.
- Getting the Green Light from Creditors: To proceed with a CVA, the business must put its plan before its creditors. At least 75% of the creditors who vote must agree to the plan. This 75% is calculated based on the value of the debts of those who vote, not the total number of creditors.
- A Workable and Beneficial Plan: The plan the company proposes must be practical and doable. It should show that the creditors will end up in a better position than if the company closed down through a liquidation. This usually means the company has to develop a solid business strategy to make enough money to follow through with the CVA terms.
- Choosing a Supervisor: A qualified insolvency practitioner must be appointed to oversee the CVA. This person ensures the company sticks to the agreement and pays the creditors as promised.
- Type of Business Structure: CVAs are an option for various businesses, like limited companies, limited liability partnerships (LLPs), and other similar entities. If just one person or a partnership runs the business, they can look into something similar called an Individual Voluntary Arrangement (IVA).
- Needing Court’s Approval: In certain situations, a court’s approval might be necessary for the CVA, especially if there are objections from creditors or shareholders.
Applying for a Company Voluntary Arrangement in the UK
A UK CVA (Company Voluntary Arrangement) can be applied for by a company’s directors, shareholders, or the appointed insolvency practitioner.
Company Voluntary Arrangements Process
The Company Voluntary Arrangement (CVA) process includes various essential stages:
- First Discussion and Evaluation: The company contacts a licensed insolvency practitioner to check if a CVA might help. The insolvency practitioner looks at the company’s financial situation to see if a CVA could work.
- Drafting the Proposal: If a CVA seems right, the insolvency practitioner helps create a plan. This plan says how the company is doing financially, why it’s having problems, and how it will pay creditors back over time. It also suggests changes for the business.
- Report by the Nominee: The insolvency practitioner reviews the plan and makes a report for the court. This report examines whether the CVA plan is doable and tells creditors what they should think.
- Meeting with Creditors: Creditors see the proposal at a meeting. They get the proposal and the nominee’s report early. They can vote on it in person, through someone else, or by mail.
- Approving the CVA: To agree on the CVA, at least 75% (by the amount owed) of the creditors who vote need to say yes. This doesn’t count associated creditors, like employees or company directors.
- Making It Happen and Keeping Watch: If agreed, the IP becomes the ‘supervisor’ of the CVA. The company starts paying as promised in the plan. The supervisor pays creditors and checks if the company follows the CVA rules.
- Finishing Up: If the company keeps all the CVA terms, the plan is finished, and any leftover debt might be forgiven. The company keeps working without those debts.
Remember, while the directors still control the business during a CVA, the company must follow the agreed rules to avoid being shut down. A CVA usually lasts 3 to 5 years, but it can change depending on the company’s situation.
How Long Does a CVA in the UK Take?
On average, CVAs usually need about 8 weeks from appointing the insolvency practitioner to getting approval from the creditors.
Sometimes, a CVA might finish faster than 8 weeks, but it might take longer in other cases. Remember, the CVA process can only start after the insolvency practitioner has been chosen.
Cost of Company Voluntary Arrangement in the UK
Before proposing the CVA, a financial report outlining the company’s current finances and forecasts for the upcoming year is prepared. Fees for these documents are usually paid upfront, ranging between £2000 and £5000 (can vary depending on some factors), depending on factors like the number of creditors, employees, the bank’s position, and the negotiation levels required. Essentially, a CVA involves negotiations and discussions with involved stakeholders.
The Insolvency Practitioner charges a “Nominee Fee” for drafting and negotiating the proposal. This fee is adjustable from the agreed payments made by the company.
The “Supervisory Fees,” charged annually by the Insolvency Practitioner, cover the management of the CVA. The costs vary but will be clearly stated in the CVA proposal.
Role of Directors in a Company Voluntary Arrangement in the UK
Usually, directors keep managing the company as usual in a CVA. Yet, an insolvency practitioner supervises them, ensuring they work for the creditors’ benefit.
Sometimes, creditors might demand a management change in the CVA. It happens if creditors feel the current directors aren’t capable or have acted irresponsibly previously.
Effect of Company Voluntary Arrangement
A CVA offers a structured debt repayment plan, assuring creditors of eventual payment but potentially lowering returns. It legally binds unsecured creditors to the agreement yet does not affect secured/preferential creditors. Employees typically retain jobs during the CVA, but operational changes may lead to job cuts.
Landlords might face altered rental terms, prompting legal challenges if they perceive unfair treatment. Challenges can arise from creditors contesting the CVA’s fairness or procedural irregularities within 28 days. While providing a lifeline for debt restructuring, a CVA brings uncertainties for creditors, employees, and landlords due to potential disputes and altered agreements.
Advantages of a Company Voluntary Arrangement
A CVA offers breathing space, allowing the company to keep running while managing debts through affordable repayments agreed upon with creditors. Take a look below to learn the advantages of a Company Voluntary Arrangement (CVA) in the UK:
Management Keeps Company Control and the Business Stays Open
In a Company Voluntary Arrangement (CVA), the company’s directors keep running the business, and it doesn’t have to stop its operations. This is important because it means the people who know the business best can keep making important decisions and keep things running smoothly without the disruption that can happen in other situations where a company owes a lot of money.
More Affordable
A big plus of a CVA is that it doesn’t cost as much as other ways to fix financial problems, like going into administration. The lower costs involved in a CVA make it a good choice for companies struggling with money and wanting to solve their financial problems without spending too much.
Keeps Things Private
A CVA is less public than other ways of dealing with debt. Companies don’t have to tell their customers or the public about the CVA, which lets them better manage their reputation and business relationships when money matters are delicate. This can help keep customers confident and the business stable.
Legal Protection from Creditors
One of the key benefits of a CVA is that it creates a legal ‘moratorium,’ kind of like a protective bubble, that stops creditors from taking legal action against the company while the CVA is in place. This allows the company to manage its finances without worrying about legal problems, allowing for a more thoughtful way of dealing with and solving its money issues.
Stops Additional Debt from Growing
A CVA can freeze interest and extra charges on the company’s debts. This means the amount they owe won’t keep growing, which helps keep the company’s financial situation stable and lets them focus on paying back what they’ve agreed to in the CVA.
Can End Costly Contracts
In a CVA, a company can end contracts that are too expensive or not helpful, like supply deals, leases, or employment contracts. This ability to get out of these contracts can help cut costs and debts, which is a big help in getting the company’s finances back on track.
Includes Cost of Insolvency Experts
In a CVA, the monthly money you pay includes the fees for the Insolvency Practitioners. This is good because it means there are no surprise extra costs for their help, making it easier to plan your finances.
No Automatic Check on Directors
If a company chooses a CVA instead of shutting down (liquidation), there’s no required check on what the directors did. This can relieve the directors because it means less intense scrutiny and fewer personal risks than if the company had to shut down.
A Better Choice Than Shutting Down
A CVA is usually a better choice than closing the company (liquidation) because it’s only suggested if it will give back more to the people the company owes money to than if the company were to shut down. This ensures the CVA is a good option for the company and its creditors, aiming to give the most back and keep its value.
Possible Debt Forgiveness at the End
A significant advantage when a CVA finish is that any debts left might be forgiven. This can help the company get back on its feet financially, leaving the CVA with fewer debts and a stronger base for the future.
Company Voluntary Arrangement Disadvantages
Every beneficial thing has its own drawbacks. A CVA also has its disadvantages, which should be carefully considered. The disadvantages are as follows:
Effect on Business Credit Score for Six Years
One major downside of a Company Voluntary Arrangement (CVA) is that it can lower the company’s credit score for six years. While it won’t harm the personal credit scores of the directors, it does mean the company itself will have a more challenging time getting credit for a while. This can make it hard for the company to borrow money in the future, affecting its ability to grow and stay flexible financially.
Getting Banks on Board Can Be Tough
Convincing a bank to agree to a CVA isn’t always easy. Banks might be wary about saying yes to a CVA because it’s risky and uncertain. If the company can’t get the bank’s support, it can be a big hurdle since that support is often vital to making the CVA work and keeping the company running smoothly.
Some Creditors Might Not Like the Long Process
The length of time a CVA takes can be a problem for some people or companies the business owes money to. They might not be happy about waiting a long time to get their money back and might prefer a quicker way to settle the company’s debts. Winning over these creditors is crucial, but their dissatisfaction can make it harder to approve and implement the CVA.
CVA Terms Don’t Cover Secured Debts
A significant limitation of a CVA is that it doesn’t apply to secured debts. This means lenders like banks or tax authorities who have secured debts can still take action against the company, like cutting off funding or pushing for the company to be shut down, even if there’s a CVA. This can be a considerable risk to the company’s financial health and the success of the CVA.
Risk of Shutting Down if CVA Doesn’t Work
If the CVA plan is not approved, the company’s directors might have to choose between voluntarily shutting down the company or being forced to shut down by the creditors. This is a severe risk because failing to get the CVA approved can worsen the company’s financial problems, possibly leading to the company closing down for good. Developing a CVA plan that’s likely to work is essential.
What If a CVA Proposal Got Rejected?
If shareholders or creditors reject your CVA proposal, you must consider other options for dealing with your company’s insolvency. Take a look below to learn your options:
- Administration: During administration, the business gets a break from legal actions. An administrator steps in to pay creditors and may sell assets to cover debts and keep the business running.
- Pre-pack Administration: Pre-pack administration allows your company to sell some assets to a new company, settling debts through an insolvency practitioner. You can start anew with the assets your old company built, but you and your fellow directors must buy them at market value.
- Liquidation: Selling your company’s assets to raise funds for repaying creditors. Liquidation always leads to the closure of your company and the cessation of its operations.
Company Voluntary Arrangement and Administration
In an administration, an appointed insolvency practitioner takes control of the company and its future decisions. Alternatively, the company’s directors continue their control in a CVA, adhering to a repayment plan for its debts. This difference also impacts how the company operates, with a CVA allowing regular business while the administration may entail an immediate halt to trading at the administrator’s discretion. Furthermore, while a CVA doesn’t assess directors, administration involves managerial inquiries.
A Cautionary Note
Due to potential savings and lease flexibility, businesses might view CVAs as a way to cut costs. However, even after a CVA is approved, creditors have 28 days to contest it based on the following two of reasons:
- Unfair Prejudice: Depending on its impact, unfair prejudice involves how the CVA treats different unsecured creditors. Challenges on this basis are rare due to high evidential requirements, negative public perception, and liquidation often being a worse outcome.
- Material Irregularity: Creditors can contest a CVA based on material irregularity if they believe the CVA implementation process wasn’t followed correctly. Any proposed plan should demonstrate why a CVA is the best choice and ensure better returns than other insolvency options.
FAQs
Q1: Will I Lose My Customers if My Company Enters a CVA?
Answer: No, you won’t. Customers won’t leave if you consistently provide your products or services punctually and top-notch.
Q2: Should I Tell My Customers My Company Is Entering a CVA?
Answer: The choice is yours, and it should be based on your understanding of the client’s relationship with the company, their needs, and agreements. If you decide to inform them, it’s helpful to have a CVA advisor present to clarify any misunderstandings about the situation.
Q3: Who Oversees a Company Voluntary Arrangement Procedure?
Answer: An IP or insolvency practitioner—who plays a critical role throughout the CVA process—oversees the Company Voluntary Arrangement (CVA) procedure. Initially, the IP evaluates the company’s financial condition, assists in developing the proposal, and acts as a ‘nominee’ submitting reports to the court. Upon approval, the IP becomes the ‘supervisor,’ ensuring compliance and managing the CVA implementation.
Last Words
That’s it. We are at the end of our comprehensive guide on “company voluntary arrangement in the UK.”
In a nutshell, a Company Voluntary Arrangement (CVA) in the UK presents a valuable opportunity for insolvent companies to restructure and recover. Understanding this vital insolvency proceeding is essential for navigating financial challenges and securing the future of your business.
By exploring the complexities of a CVA, you qualify your company to make informed decisions, potentially salvaging its operations and paving the way for long-term sustainability. Embrace the chance to restructure with a CVA, safeguard your company’s future, and embark on a path toward financial stability and success.
