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How to Propose a Company Voluntary Arrangement (CVA)

A Company Voluntary Arrangement (CVA) can offer struggling businesses an opportunity to restructure their debts and continue trading. By providing a formal agreement between a company and its creditors, a CVA allows a business to repay its debts over time while avoiding liquidation. This article explains the process of proposing a CVA, the key steps involved, and considerations for both directors and creditors.

What is a CVA?

A CVA is a legally binding agreement that enables a company to repay its creditors either in whole or in part over an agreed period. It is often used by companies experiencing financial difficulties but with a viable underlying business. The goal is to allow the company to trade its way back to profitability while creditors receive a more favourable return than they would in a liquidation scenario.

Who Can Propose a CVA?

A CVA can be proposed by:

  • The company’s directors (in most cases).
  • An administrator or liquidator if the company is already subject to insolvency proceedings.

Shareholders and creditors themselves cannot directly propose a CVA but play a role in approving or rejecting the proposal.

Preliminary Considerations Before Proposing a CVA

Before proceeding with a CVA, directors should:

  1. Assess the Company’s Financial Position: Review the company’s assets, liabilities, and cash flow to determine whether a CVA is viable.
  2. Consult a Licensed Insolvency Practitioner (IP): Only a licensed IP can prepare and oversee the CVA process. Their role is critical in drafting a realistic proposal and ensuring compliance with legal requirements.
  3. Engage Key Stakeholders: Open communication with major creditors can increase the chances of securing their support for the CVA.
  4. Evaluate Alternatives: Directors should consider whether other insolvency solutions, such as administration or liquidation, may be more appropriate.

Steps to Propose a CVA

Step 1: Appoint a Licensed Insolvency Practitioner

The directors must appoint a licensed IP who will act as the nominee for the CVA. The nominee’s primary role is to review the company’s proposal and prepare a report for the court and creditors.

Step 2: Prepare the CVA Proposal

The CVA proposal should include:

  • An Overview of the Company’s Financial Position: Details of the company’s assets, liabilities, and ongoing trading activities.
  • Repayment Plan: A clear schedule outlining how and when debts will be repaid.
  • Explanation of Benefits: Reasons why the CVA offers a better outcome for creditors than liquidation.
  • Impact on Stakeholders: A statement explaining how the CVA will affect creditors, employees, and shareholders.

Step 3: Submit the Proposal to the Nominee

The directors present the CVA proposal to the nominee (IP). The nominee assesses whether the proposal is fair and feasible, taking into account the interests of all parties.

Step 4: Court Filing

If the nominee approves the proposal, they submit a report to the court. This report includes the CVA proposal and the nominee’s opinion on its viability. Once filed, the court schedules meetings for creditors and shareholders to consider the proposal.

Step 5: Convene Meetings with Creditors and Shareholders

The nominee arranges separate meetings for creditors and shareholders. During these meetings, stakeholders vote on whether to approve the CVA.

  • Approval Requirements: The CVA must be approved by:
    • At least 75% (by value) of voting creditors.
    • A simple majority of shareholders.

Implementation of the CVA

Once approved, the CVA becomes binding on all creditors, including those who voted against it. The company must then adhere to the terms of the agreement. Key aspects of implementation include:

  • Ongoing Supervision: The insolvency practitioner becomes the CVA supervisor, monitoring the company’s compliance with the repayment plan.
  • Payment Distribution: Funds are collected and distributed to creditors according to the agreed schedule.
  • Regular Reporting: The company provides periodic updates on its financial performance to the supervisor and creditors.

Failure to adhere to the terms of the CVA may result in termination of the arrangement, leaving creditors free to pursue other recovery options.

Advantages of a CVA

A CVA offers several benefits, including:

  • Business Continuity: The company can continue trading while restructuring its debts.
  • Avoidance of Liquidation: Creditors are likely to receive a better return than in liquidation.
  • Protection from Legal Action: Once the CVA is approved, creditors cannot take individual enforcement actions.
  • Flexibility: Terms can be tailored to the company’s financial situation and cash flow.

Challenges and Risks of a CVA

Despite its advantages, a CVA is not without challenges:

  • Creditor Approval: Securing the required majority support from creditors can be difficult.
  • Stigma: Entering a CVA may damage the company’s reputation with customers and suppliers.
  • Financial Discipline: The company must adhere strictly to the repayment plan, which can strain cash flow.
  • Risk of Failure: If the company’s financial position deteriorates further, the CVA may collapse, leading to insolvency.

Alternatives to a CVA

If a CVA is not suitable, other options include:

  • Administration: Provides a moratorium on legal actions while a restructuring plan is devised.
  • Pre-Pack Administration: Allows the company to sell its assets and business to a new entity.
  • Liquidation: Involves winding up the company and distributing its assets to creditors.

Key Considerations for Creditors

Creditors should carefully evaluate a CVA proposal to determine whether it is in their best interests. Key factors include:

  • Repayment Terms: Are the proposed payments realistic and sufficient?
  • Viability of the Business: Does the company have a credible plan for returning to profitability?
  • Alternative Outcomes: Would liquidation or administration provide a better return?

Creditors have the right to request modifications to the CVA terms before voting.

Concluding comments

A CVA can be an effective tool for companies facing financial distress, offering a lifeline to restructure debts and continue trading. However, the process requires careful planning, professional guidance, and the support of creditors. By understanding the steps involved and addressing potential challenges, businesses can increase their chances of successfully implementing a CVA and securing a sustainable future.

If you require legal advice concerning commercial or insolvency law matters, please call our office today on 02476 231000 or email enquiries@askewslegal.coPlease note that this article is for information purposes only and does not constitute legal advice.