Written By Keith Steven
A Company Voluntary Arrangement (CVA) is a legally binding agreement that helps struggling, but viable, businesses manage their preferential and unsecured debts while continuing to trade.
The CVA process offers several significant advantages for businesses. It provides protection from legal actions like winding-up petitions while allowing companies to restructure their costs and debts effectively. Companies can continue trading throughout the arrangement, working towards recovery while maintaining director control. It’s a versatile solution suitable for all types of company and is a powerful government backed rescue mechanism introduced by the Insolvency Act 1986.
As an alternative to liquidation or administration, a CVA offers a structured path to business recovery. In fact, the government published a report in 2022 that found the mechanism was fair to creditors.
To proceed, the CVA requires approval from 75% of creditors (by value), after which it creates a legal moratorium protecting the company from creditor actions. The process typically runs between one and five years, with a licensed insolvency practitioner acting as the CVA Supervisor. This role mean he or she supervises the arrangement and monitors the company’s financial health. The Supervisor does not manage the company in any way. The supervisor manages the CVA debts and collects the monthly (repayment) contributions from the company.
The Supervisor then, over time, repays the creditors in order of their priority in insolvency.
KSA Group has successfully implemented over 500 CVAs, and, in our opinion, it is the best rescue tool for a company burdened by historic debt. We have returned over £30m to unsecured creditors between 2009 and 2022 and £19m to HMRC.
How does a CVA affect creditors?
All unsecured creditors are bound by the CVA terms, regardless of whether they voted for or against the proposal. They must submit a “proof of debt” form to the supervisor and over time they will receive dividends on those debts, typically over 1-5 years.
Creditors can challenge the CVA proposal if they believe it is “unfairly prejudicial” or there are “material irregularities”. However, such challenges must be made within 28 days of the creditors’ meeting where the CVA was approved. Such challenges to CVA decisions are very rare indeed.
Can secured creditors be bound by the CVA process?
Secured creditors can vote in the CVA process for the shortfall between the value of their debt and the likely (much lower) debt recovery in liquidation. Secured creditors can agree to be bound by the CVA process, if the proposal sets out why and how the secured creditors debts will be treated by the CVA and the CVA Supervisor.
The likelihood is the secured creditors will be repaid in full (or in part) over the life of the CVA. Although the repayment could be in full within a few months of the CVA being approved, if new secured debt can be raised and used to repay existing secured creditors/lenders or banks.
What is the difference between a Company Voluntary Arrangement and administration?
The main difference is that, during administration, the Administrator or Insolvency Practitioner manages the company whereas, in a CVA, the directors remain in control of the company; this is providing they abide fully by the terms of the CVA agreement.
Other important differences include:
- There is an investigation into the director’s conduct during an administration but not in a CVA.
- Secured creditors can appoint administrators to take control of a business involuntarily, whereas a CVA is a voluntary agreement between a company and its creditors.
- Administration is a more complex and costly process, partly because it involves the Court, insolvency practitioners fees and solicitors fees, so there are greater legal costs to pay.
The disadvantages of a CVA
- Until the CVA is fully completed, the company will have no credit rating, making it difficult to secure future financing.
- The CVA process often involves strict cash flow management, as creditors may impose restrictions on credit terms.
- Restructuring a business through a CVA can be a demanding and stressful process for directors and management. Our team of experts can provide guidance to ease some of this stress.
- Raising new capital during a CVA can be challenging, as investors may be hesitant to invest in a company undergoing restructuring.
As leading turnaround experts who have been helping directors with innovative CVA plans since 1996, we thought we should put all of our expertise and experience into this 79 page Experts Guide and give it away to worried directors who are considering their options. Please take time to read it, as its hugely powerful and helpful when planning how to restructure your business and drive a turnaround of your company’s performance using this powerful tool.
AND it is fast to download and more importantly it is FREE and you do not need to provide your company details to get it. Just click the link below.
DOWNLOAD OUR GUIDE TO Company Voluntary Arrangements HERE
If you want to watch a video on the process see our CVA Video
below there is a flowchart to help explain the process
