A CVA is a deal between the company and its unsecured, trade and tax creditors, to repay them from future profits. Alternatively a deal may be written to sell assets and pay back creditors from the proceeds.
The vital components of a successful CVA are:
- A viable business that can return to profitability. Check and to see if your business is viable
- A commercially structured deal - where you do not pay too much too soon.
- The introduction of appropriate levels of working capital in addition to the restructuring of debt.
- A management that accepts that there has to be change in the company.
- Determination and hard work is essential, plus a bit of luck helps.
- Directors need to use expert CVA advisors to build the deal. Always ask advisors claiming to do turnarounds, just how many CVAs they've had approved!!
- Cautious forecasts don't expect life in CVA to be easy!
If your company can be viable in the future, but current pressure is mounting, this could be a superb solution. Remember if your company is insolvent the directors must aim to maximise creditors' interests - by continuing to trade, you will maximise their interests with a CVA.
After the directors have considered the long-term viability of the company it is essential to take appropriate advice from experienced turnaround or insolvency practitioners. 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 within the business, are prepared to fight for its survival, and the appropriate funding can be found, then a CVA is a very powerful tool. Be prepared - it is a tough fight and it is harder than liquidating the business. However, by proposing a CVA you are demonstrating that you are trying to maximise creditors' interests, so it can often be viewed positively.
If the CVA does work, then the company will be profitable and valuable for the shareholders.
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.
How long does it take? Here is a flow chart summary of the CVA process: In practice it often takes 7-10 weeks although the summary below is possible IF all of the required information is available from the outset.
The directors appoint advisors, such as 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.
A review of the company, its people, markets and systems must be undertaken. This is an important part of the process. Typically, the CVA will include a detailed 3-5 years worth of financial forecasts to help the creditors to make their decision to support the deal or not.
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.
Once the final CVA 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 the outline of the document - The bank may not agree with the suggested secured debt structure but will usually be open to negotiation with the directors and their advisors.
During the CVA production or hiatus period, current assets such as WIP and debtors are collected and turned into cash, which should improve liquidity. This can be used to fund the difficult period between appointment of CVA advisors and the filing of the document at the Court.
The CVA proposal is then filed at court, only to ensure that the proposal is ratified and carries a legal originating number.It is then printed and 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:
The proposal must then be sent to all creditors, who then consider it for the minimum notice period as above before the creditor's meeting can be held. This is usually done via video conference although creditors can request a physical meeting. We find that the HMRC team, called the Voluntary Arrangement Service (VAS), prefer to have up to 3 weeks to consider the proposals, so we always allow more than the statutory 14 day minimum period for consideration.
For more information and a full guide of the creditors meetings' process, including voting procedures, see our page here.
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.
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.
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
- No more than 50% of profits after tax and debt repayments over the deal period should be contributed.
- Contributions should be stepped to match profits achieved.
- Any lump sum contributions during the currency of the CVA should be avoided where possible.
- The use of a profits ratchet allows higher repayments if modestly forecasts profits are exceeded.
Even if the approach outlined here leads to small repayment levels of 20-50% to unsecured creditors, the creditors usually prefer sensible contributions to hopelessly optimistic forecasts.
Provided the company conforms to 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. 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.
Confidentiality of the CVA process
Your creditors will need to be informed of the process, so it is not completely confidential. However, there is no need to inform your customers and unlike administration it is not a public event. The arrangement once agreed is filed at companies house and will appear on the credit rating. There are ways to ensure that a lack of credit rating does not adversly affect the company by hiving the company. Ask us about this.
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. Now having read all of this don't you feel better? If so, that's the first step to fixing your business problems. Call now or browse this site for other ways to leave the misery of cashflow problems and insolvency behind you...
"You did really save my life/family, without you I would now be bankrupt and have no family home! I'd be 46 years old and skint (and no motorbike)! You gave me and my staff a fighting chance and you really did deliver everything you promised to us!. I am happy to be a referee for KSA Group"
Be like Dylan P, choose your advisors carefully and get the right advice for your business!
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 meet with the board if you have other directors, prepare the information you need to present the company's position and question the merits of each option you think is appropriate. Then choose advisors with care and ask them the following questions:
- "How would you structure a CVA proposal?"
- "How many of your CVAs have been rejected by creditors?"
- "How many CVAs 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 CVAs 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; but it is a very 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. 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 shareholders
Still got questions? Then click here for CVA FAQs or here for a flowchart. For further information give our team of advisors a call on 0800 9700539 now, or by email
"But my bank, my creditors, my staff and customers will have huge problems with this."
If you have worries about the CVA tool, why not visit the new guide to CVA Worries here! 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 hundreds of successful CVAs. We are regarded as one of the UK's leading specialists in this rescue method, so email or call the experts now.
KSA is one of the UK's leading turnaround practitioners in the UK and specialises in the CVA. With experience in over 500 CVAs over 19 years, we are able to deliver innovative deals that can protect your company. KSA can also assist tired and worried director's to recover their confidence and drive the turnaround that is an essential part of a successful CVA.
The typical KSA Group deal is based on preserving the company, protecting cashflow, rebuilding sales and profits and then paying debts back over an agreed period. Directors remain in control of the company and the company continues to trade under the cva, personal guarantees don't usually get called in and your business is given a fighting chance to survive. We start every deal with a blank sheet of paper and a clear mind. Every case is different, but there are always some crucial points to consider before embarking down this path. This guide is not just theory either! KSA Group knows how to restructure businesses based upon the experience gained from doing hands-on turnaround work for more than 30 years! Here's what one delighted advisor said..
"Keith Steven is one of the most creative and well informed turnaround professionals that I have worked with. He is without doubt the country's leading expert on the little used but hugely powerful company voluntary arrangement (CVA) mechanism. If your business is in trouble but still fundamentally viable then Keith is your man!"
Garry Mumford, Managing Director of Insight Associates
Thank you for visiting our website, we hope we can be of assistance to your company.
Worried about poor cashflow? How to win new work? How to pay wages on pay day? For expert advice on a range of issues download our free Ultimate Guide For Worried Directors today. Or just call us on 0800 9700539
Please note that the guide was written pre Covid-19 and there are some likely changes to insolvency rules regarding wrongful trading. Please see this page here.