In a CVA a company makes reduced payments towards its unsecured debts. The amount of debt written off during the Arrangement will depend on a number of factors.
- The amount of debt written off in a CVA
- Is there a minimum monthly payment?
- Can the amount written off change?
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The Amount of debt written off during a CVA
To start a CVA a company will always have to offer to pay as much as it can afford. This figure is based on disposable income. Disposable income is the surplus cash available after all other costs (including cost of sales and overheads) have been taken into account. In other words the profit element of the company.
CVA payments are not necessarily made monthly. They may be based on projected quarterly, half yearly or even annual figures. As such they could be paid at different points throughout the year.
Once the Arrangement is agreed the company will normally be required to make payments into it for between 3 and 5 years. After this time time the agreement will end. Any outstanding debt is then written off. As such it is common for 50% or more of a company’s unsecured debts to be forgiven.
Is there a minimum CVA payment?
There is no legally required minimum amount that must be paid into a Company Voluntary Arrangement. It is up to the company’s creditors to decide whether they will agree the proposal and projected levels of repayment.
Each CVA is based on the individual company’s unique circumstances. As such it is possible for an Arrangement to be put in place where more than 50% of unsecured debts are written off. Creditors may be inclined to agree to this if the alternative is liquidation where they would lose everything.
The money paid into a CVA must be sufficient to sustain the Insolvency Practitioner’s fees. If the company has insufficient resources to achieve this plus an acceptable return for the creditors a CVA may not be a viable option.
Can the amount of debt written off in a CVA change?
Company Voluntary Arrangement payments are not fixed. The terms of the agreement will state that if the company is able to increase its payments it must do so. This may happen if its trading position improves. As a result the percentage of debt that is repaid during the life of a Arrangement may increase.
After starting a CVA the company is still bound to repay 100% of its original debts if this is possible during the course of the Arrangement.
The amount paid can also go down. This might happen if the company’s circumstances deteriorate. Usually the creditors will have to agree the reduction at a variation meeting. If it is not accepted the Arrangement is likely to fail. This may then lead to the company being liquidated.