A Company Voluntary Arrangement (CVA) is used if a company is insolvent but the directors do not want to close it. The upfront costs are minimal. However the business must be able to pay a percentage of its debt back.
- How much does a company have to pay into a CVA?
- Is it possible to use a CVA if cash is limited?
- What happens to Director’s Guarantees?
- Find out how a CVA can stop a Winding Up Petition
When to use Company Voluntary Arrangement
Company Debt Expert James Falla talks about when a Company Voluntary Arrangement could be used. For more business debt advice visit www.companydebtadvice.net
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Use a CVA if something can be paid towards the debts
Before considering a Company Voluntary Arrangement you need to ask this question. If the burden of the unsecured debts was taken away could the company trade profitably and make a contribution towards what it owes? If the answer is yes a CVA may be an option.
Before proposing a CVA a careful review of the company’s income and expenditure forecast must take place. You must be able show that debt repayments can be made and how much these will be. Payments into a CVA do not have to be monthly. They can be made periodically or in the form of a single lump sum.
For a CVA to be accepted the company does not have to be able to repay everything it owes. The creditors accept a percentage of the debt in full settlement. They agree to this because the alternative would be the closure of the company where they would be likely to get a far smaller return.
Use a CVA if cash is limited
A Company Voluntary Arrangement can be implemented on limited resources. A minimal upfront payment may be required to put together the necessary cash flow forecasts. However the majority of the fees charged are taken from the CVA payments. Extra resources do not have to be found to fund these.
This is a significant advantage over other types of company rescue solutions such as Pre Pack Liquidation. Such solutions would almost certainly require a larger cash sum to be paid up front to purchase the failing business’s assets.
Use a CVA if Directors understand their liabilities
A Company Voluntary Arrangement is a formal insolvency procedure. Once it is in place any directors who have given personal guarantees against company debts must understand that they will become liable for these.
If Directors have given personal guarantees they should have a plan in place for how they will deal with the debts once a CVA is in place.
On a more positive note if the directors use this solution there no report on their behaviour. This is because the company is not being formally liquidated. This protects directors from accusation of wrongful trading. This could be useful if there is a question that they have knowingly allowed the business to trade inappropriately or when insolvent.
Use a CVA to protect against Winding Up
A Company Voluntary Arrangement can be used to protect the business from a Winding Up Petition. An Interim Order can be put in place which will put the winding up process on hold. If the creditors agree to the Arrangement the Petition will be overturned.
It is often HMRC who will petition for the winding up of a company. However if there is a possibility of agreeing a CVA which will provide a sensible return HMRC will often be supportive. Even if HMRC refuses the proposed Arrangement they will be legally bound to its terms if the majority of all creditors by value agree.
Will Suppliers still cooperate if a CVA is used?
Suppliers who are creditors and so included in the CVA are likely to lose out. This is because they will not be repaid everything they are owed. However it does not automatically mean they will stop supplying the business.
It is often the case that suppliers will want to maintain a trading relationship with the company. They may require payment with cash up front from now on. However this will mean that they retain a client who is likely to then continue buying from them in the long term.
New suppliers may become aware that the company is in a CVA. This will certainly be the case if they carry out a credit check against the business. However this may not prevent them from striking up a trading relationship as long as suitable payment terms can be agreed. These may be cash on delivery.