If your company is insolvent, has cash flow issues and is struggling to pay its debts then it might be able to use a creditors voluntary arrangement (CVA) to repay a percentage of its unsecured creditors over a fixed period.
CVAs are a government approved alternative to liquidation and, once agreed, all of your creditors, including unsecured ones, secured ones and even those who voted to reject the proposal are legally bound to follow the terms of the agreement.
How Does It Work?
A creditors voluntary arrangement is a formal insolvency process whereby the company and its creditors agree to make an arrangement. It’s a way of resolving the financial problems of a struggling company, which can include being behind with tax payments or having cashflow issues.
In order to be successful, the proposed CVA proposal must be accepted by more than 75% of creditors voting in favour. It must then be supervised by an insolvency practitioner, known as a supervisor.
Once approved, a CVA becomes legally binding on the company and its creditors. It can also help to reduce the company’s debt levels, making it more affordable to repay creditors.
What Are The Benefits?
A CVA can help your company to restructure, recover and return to profitability. It also allows you to make important restructuring changes relatively easily and at no cost to your business.
Unlike other insolvency procedures, a CVA is private and avoids publicity, which can be highly beneficial to your company. This can help to keep your reputation intact and prevent unnecessary worry from creditors.
Another major advantage of a CVA is that it allows directors to continue trading and maintaining control of their company. This can be very helpful in certain specialised industries as they often know their business better than anyone else.
How Long Does It Last?
A CVA lasts for a set period of time depending on the company’s financial situation and ability to pay back creditors. They typically last between 2 and 5 years but can be extended in some circumstances as the business pays creditors.
A CVA can help to ring-fence debts so that they cannot be sold on in the future. They also stop pressure from tax while the company is under stress and may allow you to terminate your employment contracts, leases and onerous supply contracts.
What Happens If It Fails?
A CVA is an effective business rescue tool which allows a company to wipe out its debts and return to solvency. However, a CVA will only be successful if all creditors agree to it.
If a CVA is not agreed by all creditors, then the company will need to look at alternative insolvency options. This can include putting the company into administration or liquidation.
Creditors can also challenge a CVA if it is unfairly prejudicial or there was some material irregularity in the procedure leading to its approval.