Company Voluntary Arrangement (CVA)

A CVA is an agreement between a company and its unsecured creditors whereby in consideration for those creditors suspending collection of their debts, the company agrees to fulfil certain obligations to enable the creditors to be paid some or all of their debt over time. Typically those obligations include the making of specified monthly contributions out of future profits into a fund controlled by a licensed insolvency practitioner over a period of time, usually up to five years.

On some occasions, a company may be facing cash flow difficulties arising from a historic event that has been resolved, but the cashflow effect of that event may take some years to recover from. It would not be unusual in such circumstances for one or more creditors to threaten compulsory winding up proceedings and even issue a winding up petition.

A CVA could be a perfect solution for companies facing such difficulties since provided the company can trade profitably going forward, the CVA process would provide protection from its historic creditors, during its recovery process.

The benefit to the company is fairly obvious in that as long as it maintains its obligations, it is allowed to continue to trade and is eventually released from its indebtedness to the creditors.

There are however a number of substantial downsides to a CVA.

Firstly, it is necessary to ensure that the company’s secured creditors and lenders are prepared to support, since if they are not, funding the business in the future may be difficult, if not impossible.

Then, the agreement of unsecured creditors to what is proposed has to be obtained. The proposal is usually prepared by the insolvency practitioner who is nominated by the company who becomes the Nominee relating to the proposal.

The proposal itself is a lengthy document and is required to comply with a number of statutory provisions and disclosure requirements. It will advise creditors what has given rise to the need to propose a CVA, what the current financial position is and what is proposed to be done to meet its liabilities.

Detailed Profit and Loss and Cashflow forecasts will also form part of the document.  The insolvency practitioner is also required to prepare a report on the proposal and this together with the proposal is filed in court.

The preparation of a proposal can therefore be an expensive exercise and because there can never be total certainty that the creditors will accept it, the insolvency practitioner will often require part at least, of his fee to be paid in advance.

In order for the proposal to be considered, meetings of the creditors and shareholders of the company are convened.

These have to be convened on 14 days’ clear notice. The creditors’ meeting is held first and at that meeting they can do one of three things:

  • They can vote to accept the proposal.
  • They can vote for the rejection of the proposal
  • They can vote for the proposal to be modified and accepted in its modified form.

In order for the proposal to be accepted, a minimum of 75% in value of unsecured creditors who vote must vote in favour. There are further provisions where creditors who are connected with the company are included in the vote and the requisite majority is achieved. In that situation, a second vote is taken with those connected votes excluded. If less than 50% in value of the remaining votes are in favour of the proposal, then it is rejected. It can therefore be difficult to achieve the required majority in some cases.

In cases where a proposal is accepted, it is very often the case that it is approved with modifications, which usually increase the company’s obligations.

Following the creditors’ meeting, a shareholders meeting is held to ratify the proposal. If it has been rejected by the creditors then the shareholders cannot override that decision. If the creditors approve the proposal then the shareholders approval is required before it can be implemented.

Where the creditors have approved the proposal with modifications, the shareholders will consider whether they approve the modified proposal. If they approve it, the proposal is accepted and becomes binding on the company and all of its unsecured creditors. If the shareholders reject the modifications, the proposal is also rejected.

It can be seen from the above that even getting beyond this step can be difficult.

Once the proposal is approved, the insolvency practitioner becomes its supervisor and his function will be to ensure that the company complies with its obligations. Throughout the process, his function will have been evolving from adviser to the company and its directors to Nominee, where he has to act as “honest broker” between the company and its creditors and finally to Supervisor, when he will effectively police the implementation of the proposal. In the event that the company defaults in its obligations, he may have to issue a winding up petition.

Companies in CVA often find that once their suppliers are aware of the position, their credit lines are restricted or withdrawn.  It is not at all unusual for goods to be supplied on a pro forma basis only. Similarly, once customers become aware of the position, they can begin to become nervous, particularly in situations where they are dependent on supplies from the company.

It is possible that they may open up alternative lines of supply to run alongside those made by the company, which would result in a reduction in turnover or even worse, they may completely resource elsewhere, with potentially devastating effects. Company’s that have previously enjoyed the benefit of “stretching” credit lines particularly those from involuntary creditors, such as the Crown, will find that they will be faced with a zero-tolerance situation in the future.

A CVA is also a matter of public record, being registered at Companies House. A company in CVA will therefore invariably find its credit rating is affected. However, much damage has often already been done to this rating by the time a CVA is considered. This may sound pretty pessimistic, but in reality many companies successfully complete CVAs. However, all of the above has to be considered and where possible, resolved before a CVA is proposed. The key is to begin to plan long before the position becomes critical.

By far the most important consideration in preparing for a CVA is what needs to change? There could be changes needed in management personnel or style or possibly the business model needs to be revised. Maybe a more aggressive credit control system is required. For a CVA to work, something must change because if nothing changes, everything will remain the same and if everything remains the same, the future will be no different from the past.

A CVA is therefore not to be entered into lightly. It can very often be the step that saves a business and forms the foundation for future profitability, but very careful consideration needs to be given to every aspect of the business before it is embarked upon.

For more information please email us using the form on the “Contact us” page or call us on 01384 686 800 to talk things through or to arrange a free, initial, no obligation consultation.