Are you considering a Company Voluntary Arrangement (CVA) to rescue your business? Here are answers to some of the main questions you will have.
- Which debts are included in a CVA?
- How much has to be paid into a CVA?
- What does a CVA cost?
- What happens to Directors Guarantees?
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Which debts can be included in a CVA?
Any unsecured debts that a company owes can be included in a CVA. This includes bank loans, credit cards, overdrafts and trade debts due to suppliers. In addition HMRC arrears such as unpaid Corporation Tax, VAT and PAYE.
Lease agreements can also be included in the Arrangement. The landlord’s claim will normally be restricted to 12 months.
Generally speaking secured debt cannot be included. These are things like a mortgage on a property or Hire Purchase agreements. These must be paid or the company will risk the repossession of the property they are secured against.
How much has to be paid into a CVA?
There is no legal minimum or maximum amount that has to be paid into a CVA. The amount that the company pays will vary depending on the specific circumstances of the business.
The monthly payments will normally be based on a sum that the business can reasonably afford. This is after all of its overheads and monthly running costs are taken into account. After the agreement is over any debt left unpaid will be written off.
If the business is able to raise any cash lump sums through the sale of assets or by other means these may also be paid into the Arrangement as cash injections.
Cash injections during the course of the Arrangement normally just increase the overall return to creditors. They do not automatically reduce its length.
How long does a CVA last?
A Company Voluntary Arrangement is designed to allow the company to pay back as much of the debt that it owes in a reasonable period of time. Generally speaking it will last between 3-5 years.
The 3-5 year period over which a CVA runs has become a standard. It is generally acceptable to most creditors. However it is possible for creditors to demand that an Arrangement runs for longer than 5 years.
Creditors may request a longer Arrangement if they feel that the amount that can be repaid within 5 years is unreasonably low. If it were to happen the Directors would have to agree to these terms. They can disagree. However it is unlikely that the Arrangement would then be accepted.
What does a CVA Cost?
There are various costs associated with a CVA. Generally a Statement of Affairs fee will be charged up front. This is the charge for analysing and documenting the current financial position and what the company can afford to pay.
Once the Arrangement is up and running further fees will be changed. These include a Nominee Fee and Supervisory Fees.
The company does not normally have to find extra funds to pay Nominee or Supervisory fees. They are taken out of the standard contributions that are made into the Arrangement.
What happens to Director Guarantees in a CVA?
The fact that a Company Voluntary Arrangement has started means that the company is insolvent. In other words it is not in a position to repay its debts.
In these circumstances if any of the debts have been guaranteed the bank will demand that the guarantor pays the balance. The bank will normally be happy to agree a sensible repayment plan with any Director who has given a guarantee. However they will use legal proceedings to enforce payment if necessary.
If a company starts a CVA the Directors will need to plan for how they will repay any debts they have guaranteed. This may involve implementing a personal debt solution such as an IVA.