A Company Voluntary Arrangement (CVA) allows a company to reduce its debt payments. The agreement typically lasts 3-5 years. Once completed the remaining unsecured debt is written off.
- Find out if a Company Voluntary Arrangement is right for your business
- The steps needed to set up a CVA
- How will a CVA affect Directors and Employees?
- What does a Company Voluntary Arrangement cost?
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What is Company Voluntary Arrangement?
Company Debt Expert James Falla describes a Company Voluntary Arrangement. For more business debt advice visit www.companydebtadvice.net
When to use a Company Voluntary Arrangement
A CVA would normally be used when a company is struggling with debt but its business plan is fundamentally sound. In other words it would be profitable if its unsecured debts could be reduced to a manageable amount.
The company must be in a position to make some contribution towards its debts. This is often in the form of a monthly payment. However payments could also be made quarterly or as a single one off lump sum.
This solution can also be used to protect the company if a winding up petition has already been issued. The Arrangement can be introduced if the majority of the company’s creditors are in agreement. The petition is then overturned.
How to implement a Company Voluntary Arrangement
A Company Voluntary Arrangement must be agreed up front with the company’s unsecured creditors. If you are a director you cannot do this negotiation yourself. You will have to appoint a licensed Insolvency Practitioner (IP).
The IP will help you produce a written proposal on behalf of the company. This shows the unsecured creditors the extend of the company’s problems and explains how much it can afford to repay. The Arrangement can only be put in place if 75% of the value of the unsecured creditors who respond agree to the proposal.
Generally speaking a CVA can be set up and agreed within 4-8 weeks. During this time it is normal for the IP to have informal discussions with the company’s major creditors (especially the bank and HMRC) to gauge their willingness to accept the Arrangement.
Company Voluntary Arrangement and Directors
Once a CVA is implemented the directors of the company can remain the same. There is no reason for any of them to resign. Having said that one or more of the larger creditors may demand changes to the way the company is run. If they stipulate this as part of the Arrangement the changes will have to be made or it will be at risk of failure.
An advantage of using a CVA over closing the company is that there is no formal investigation of the conduct of the directors. In addition if any of the directors owe the company money arrangements can be made for these debts to be repaid.
A CVA is a formal insolvency procedure. If any of the directors have personally guaranteed any of the company’s debts they then become personally liable to pay them.
Company Voluntary Arrangement and Employees
Implementing a Company Voluntary Arrangement does not mean that employees are automatically put at risk. The business will continue to trade and employees contracts will remain in place.
Having said that in order for the company to trade profitably a certain amount of restructuring may be required. This could result in changes to employment terms and even job losses. If this were to happen any affected employees must be treated as per their contracted terms and conditions and within the rules of employment law.
Cost of Company Voluntary Arrangement
There are various costs associated with a Company Voluntary Arrangement. Normally considerable work will have to be carried out up front. This would include gathering information about the company’s current financial position and producing trading projections. The company can expect to pay between £2000 and £5000 for this work depending on complexity.
After the initial fee has been paid the company will not normally have to pay further fees until the Arrangement is in place. During the negotiations with creditors an agreement will be made about how much the Insolvency Practitioner can charge during the Arrangement. These fees are known as Nominee and Supervisory fees.
Nominee and Supervisory fees may be as much as £10,000 during the course of the CVA. However the company will not have to pay these fees directly. They will be deducted from the agreed payments that the company makes into the Arrangement.