How does a Company Voluntary Arrangement work?

If your company is in financial difficulty a Company Voluntary Arrangement (CVA) could stop court action. In addition 50% or more of the company’s unsecured debt may be written off.

Do you want help to start a CVA? Give us a call (0800 180 8440) or complete the form below to speak to one of our experts

What is a Company Voluntary Arrangement

A Company Voluntary Arrangement (CVA) is designed to reduce the pressure of unsecured debt payments. The company’s creditors agree to accept reduced payments over 3-5 years. After this time any unpaid debt is written off.

Creditors accept a CVA proposal because they realise the alternative is the likely closure of the company. This would normally result in them being unable to recover any of their debt.

The business maintains agreed repayments based on an amount that it can sensibly afford. These may be paid monthly or at different intervals such as quarterly or even annually. While the Arrangement is in place no further interest or charges can be added to the outstanding debts.

Because the burden of its unsecured debts is reduced this frees up cash. The company should then be in a position to pay its ongoing priority debts and grow.

The Cost of a CVA

Compared to other company rescue solutions a CVA is relatively cost effective. Firstly the cost of implementation is relatively low. Normally the company will just have to pay a Statement of Affairs fee.

There are additional fees payable to the Insolvency Practitioner who implements and supervises the Arrangement. These are known as Nominee and Supervisors fees. However they are deducted from the company’s payments. They are not added in addition.

A company does not have to find extra money to pay fees during the course of a Company Voluntary Arrangement.

This gives the CVA a significant advantage over Pre Pack Liquidation which often requires more up front investment particularly in regard to buying the assets of the old company.

How to ensure the success of a CVA

One of the major issues of a CVA is that there is generally no requirement for a change in the company Directors or management team. As such once the Arrangement is in place mistakes of the past may continue to be made.

To avoid this situation the directors should consider introducing a new member to their Board. The idea is that the new person will suggest new ideas and methods of working. The adoption of these will ensure that the company has a better chance of survival and growth.

The directors of the company will also have to plan for how they will run the business with reduced access to credit. The company’s credit rating will become poor and it will be more difficult to open trade accounts with suppliers. Bank credit facilities such as a credit card and overdraft will also be withdrawn.

For a CVA to be successful the directors will have to ensure the company has sufficient cash. This may be achieved with new investment funds. Alternatively they should investigate the different finance options which can be used to raise cash.

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