Company Voluntary Arrangement

This section contains detailed plain English guides to this insolvency mechanism – read down the page or print off for easy reading.

What if there was a way we could save the company rebuild sales and profits without closing it or seeing all of our hard work lost without having to start again”? There is and you have found it……

It’s called the Company Voluntary Arrangement and it has been around for 20 years now. What does it mean and how does it work? Well these pages will help you learn all about the CVA and how it can help your company. If you would prefer a pictorial flowchart click here "Company Voluntary Arrangement".

FIRST the simple description of a CVA!

It is a deal between the insolvent company and its creditors; this contract allows the company to repay some or all of its debts from future profits. Isn't it better to do that than see the company enter terminal insolvency and every creditor losing their money and an ongoing customer?

CVA’s are amazing for rescuing a company that is in trouble when you know it can be profitable in future. You can make employees redundant with no cost, get out of leases and problem contracts and make the business profitable again with the CVA and our help.

In the time it takes to do a CVA you freeze payments to VAT, PAYE and creditors. Then you offer them a deal over time to pay something back from future profits. This improves the cashflow in your business.

We are often asked “If it’s so great why doesn’t everyone use the CVA if their business gets into trouble”? The answer is because very few people know about this fantastic tool and most companies end up going bust because they are scared of insolvency. Get help from reading these guides now or call us.

”Use us to propose your CVA and we will guarantee that it will be accepted by creditors. More than 97% of our client’s CVA proposals are accepted by HM Revenue and Customs and trade creditors”!

CVA's - A more detailed guide.

If you would prefer a pictorial flowchart click here "Company Voluntary Arrangement". If you would prefer frequently asked questions guide to help you understand the longer guide click here "Company Voluntary Arrangement FAQ’s" or if you would like samples of Company Rescues CVA Case Studies please click here "CVA Case Studies"

The CVA is a deal between the company and its creditors (unsecured, trade and tax) to repay them from future profits (or a deal may be written to sell assets and pay back creditors from the proceeds).

The deal is based on preserving the company, rebuilding sales and profits and paying something back over a period of time to be agreed. Directors remain in control, personal guarantees don’t get called in (usually) and it gives your business a fighting chance to survive.

We start every CVA deal with a blank sheet of paper and a clear mind. Every case is different but there are some crucial points to consider before embarking down this path.

Vital Components of a successful CVA are

• A viable business that can return to profitability.
• A commercially structured deal - do not pay too much too soon.
• Introduction of appropriate levels of working capital in addition to the restructuring of debt.
• The management accept that there has to be change in the company.
• Determination and hard work is essential

So if your company can be viable in future but pressure is mounting this could be a good solution.

Remember the deal should aim to maximise creditors’ interests- by continuing to trade you will do that in a CVA.

After the directors have considered the long-term viability of the company it is essential to take appropriate advice from experienced turnaround advisors. We believe that it is vital to have commercially pragmatic and creative specialists involved from as early a stage as possible.

If a company has a viable future, the directors and management accept the need for change, are prepared to fight for its survival and the appropriate funding can be found, then a CVA is a very powerful tool. BUT be prepared - it is a tough fight and it is harder than liquidating the business. By proposing a CVA you are demonstrating that you are trying to maximise creditors’ interests so it can often be viewed positively.

Who can propose a CVA?

A CVA may be proposed by the directors of the company. When the company is either in liquidation or administration, the liquidator or administrator can propose a CVA.

A CVA can only be proposed if a company is insolvent or contingently insolvent.

A summary of the CVA process:

See CVA’s Flowchart for a graphical illustration: Click Here

1. The directors appoint advisors, turnaround practitioners or an insolvency practitioner (IP) to assist in the construction of the proposal. During this "hiatus" period the company should not materially increase or decrease debts to any creditor, suppliers should be paid for supplies made (not always easy!) and activity of the company continues.
2. A review of the company, its people, markets and systems should be undertaken. This is an important part of the process. Typically the CVA will include detailed financial forecasts to assist the creditors to make their decision to support the deal or not.
3. Once the draft proposal is ready the directors will typically review and refine it and agree that the proposal is appropriate, achievable and maximises creditors’ interests. If the directors do not believe that it is sensibly structured, or that the process has highlighted weakness in the business then it is advisable to close the business (See guide to creditors voluntary liquidation)
4. Once the final drafting has been completed the directors should then discuss the position with the company's’ secured creditors. Experience tells us that the ability to deliver a quality draft proposal at this stage is preferable to verbal assurances that a CVA will be written and the bank told what the contents are when it’s ready! We find that the banks are very keen to get involved and assist where they see a viable company. Often they will want to see how the company will repay the bank’s debts. This should be included in outline in the document - of course the bank may not agree with the suggested secured debt structure but will usually negotiate with the directors and their advisors.
5. During the hiatus period current assets such as WIP and debtors are collected, turned into cash and liquidity often improves. This should be used to fund the difficult period between appointment of advisors or IP’s and filing the document at court.
6. Once filed at court (it is filed at court only to ensure that the proposal is ratified and carries a legal originating number) the proposal is distributed to all creditors. The court does not have an active part to play in this process but the CVA proposal sent to creditors must be a true signed copy of the document filed at court.

After the Proposal is completed:

1. The proposal must then be sent to all creditors who then consider it for the minimum notice period as above before the creditors meeting can be held. This is usually held at an independent venue (theoretically at the convenience of creditors).
2. The meeting will be chaired by the advisor or an IP. Creditors are often represented by technical professionals from other insolvency firms. The aim of the meeting is to allow the creditors to question the director’s proposals, however it is not a place for settling disputes.
3. At the meeting the creditors vote on the proposal and the proposal will be approved if a majority vote of 75% by value of the total value of creditors at the meeting (whether in person or by proxy) vote in favour. A second vote excluding connected creditors is taken and provided that not more than 50% of creditors vote against the proposal it is approved. For an example of votes at a creditors meeting click here
4. In our experience the voting at meetings is an area that concerns many directors. Provided the work has been done thoroughly before the CVA is filed at court then the worry should be mitigated. In our CVA’s the Combined Voluntary Arrangement Service, (CVAS) which represents the Inland Revenue and HM Customs & Excise, will always support viable proposals that are well built and show proper care and attention to detail. Given that the CVAS often represents the largest votes, then we ensure that they are comfortable with the CVA very early in the cycle of events.
5. The Chairman controls the ability to vote and provided creditors have been asked to consider a sensibly structured deal, almost all proposals are accepted by creditors. Also the creditors may wish to modify the proposal - once again the modifications need to be approved by the majority votes above. This often done by the Inland Revenue and VAT agencies to ensure future debts are paid on time and future filing of tax returns is done correctly. Occasionally other creditors may ask for a modification to the proposal.
6. At the same time as the creditors meeting, the members (shareholders) meeting is held. Members decide whether to accept the proposal as made or modified and a vote of 50% in favour is required.
7. If both meetings approve the proposal the meetings close. The chairman must then issue a chairman’s report, within 4 days, to all creditors and the court, stating what happened, who voted and how they voted.
8. Once approved all notified and included creditors are legally bound for the debt "frozen" in the proposal. No further legal action (except by leave of court) can be taken against the debtor company and the creditors will receive dividends from the supervisor as described in the proposal.
9. After the approval the company must make the agreed contributions to the trust account administered by the supervisor. Failure to keep up with contributions is deemed a default and the company voluntary arrangement can be "aborted". This usually leads to liquidation or receivership.
10. In our opinion the best way to avoid this is to structure the deal on the following basis. Prudent forecasts of directors should be further scaled back and modest forecast profits should be used as the basis for contributions BUT:
    i) No more than 50% of profits after tax and debt repayments over the deal period should be contributed.
    ii) Contributions should be stepped to match profits achieved.
    iii) Any lump sum contributions during the currency of the CVA should be avoided.
    iv) The use of a profits ratchet allows higher repayments if modestly forecasts profits are exceeded.

Even if the approach outlined in 10 leads to small repayment levels to unsecured creditors, the body of creditors usually prefers sensible contributions to hopelessly optimistic forecasts.

Provided the company conforms with its "public domain business plan" (the CVA proposal) and makes its contributions, then the CVA continues for the agreed period. The supervisor is generally not involved in the business (in our CVA's). THE DIRECTORS REMAIN IN CONTROL.

What if things don’t go well?

If the company is not performing well and yet it would still appear to be viable, then it is theoretically possible to reconvene the creditors meeting at any time to ask the creditors to consider amendments. If the Supervisor has concerns, he can also ask the court for directions. In most cases the directors should inform the supervisor if there are any material changes to the company or its business.

What happens at the end of the CVA period?

Once the agreed period is completed and the supervisor has issued a completion certificate, then the company leaves the CVA state. Any remaining unsecured debts (where partial repayment was approved) are written off and the directors continue to run the business for the shareholders.

Summary of the CVA mechanism.

Clearly, the issues raised above demand that the directors or proposers of the CVA should take expert advice. Before taking advice make sure you understand the company’s position, you have read and understood our guides to the other options available. Then prepare your board to present the company’s position and question the merits of each option you think is appropriate.

• Then choose advisors with care, ask them the following questions
• How would you structure a CVA proposal?
• How many of your CVA’s have been rejected by creditors?
• How many CVA’s have included descriptions of the management changes proposed and the cost attached.
• Do you have a good relationship with the VAS (Voluntary Arrangement Service)?
• Will you give me a detailed recommendations report, of around 15-25 pages, which contains all of your costs for the CVA (in writing) after a detailed 3 hour meeting?
• How many CVA’s have you been involved with?
• Finally ask the main question... "What is your success rate"?

It is also worth pointing out that the CVA is not a panacea for your company, rather it is a powerful framework for change and protection of a distressed but viable company. In reality although difficult to propose and get approved, getting the CVA approved is the easiest part of a rescue/turnaround– making a turnaround work is much more difficult and needs professional help.

Visit www.ksacompanyrescue.co.uk to see how we approach the CVA, case studies of our work and an introduction to our experts across the UK.

Remember:

The CVA should aim to:

• Maximise creditors’ interests.
• Preserve viable but distressed businesses.
• Preserve economic activity and save jobs.
• In time return value to the creditors.
• Provide a real prospect of a return for members (shareholders).

Still got questions? then click here for CVA’s FAQ’s or here for a flowchart or give our team of advisors a call on 0800 9700 539 now, or by email

Now that you have read our guide(s) we hope we have demonstrated that we know how to use the CVA mechanism based upon many years and scores of successful CVA’s. We are regarded as one of the UK’s leading specialists in this rescue method, so email or call the experts now.

Our sister company KSA is one of the UK’s leading turnaround practitioners in the UK and specialises in the CVA. With experience in over 250 CVA’s over 12 years they are able to deliver innovative deals that can protect your company. KSA can also assist tired and worried directors to recover their confidence and drive the turnaround that is an essential part of a successful CVA.

If you would like to see more information on how we use the mechanism or read about some case studies visit www.ksacompanyrescue.co.uk

Still worried about using the CVA tool? See our new guide to CVA Worries.

Thank you for visiting our CVA website, we hope we can be of assistance to your company.