Helping directors for over 23 years.

Talk to us today in confidence:

Company Voluntary Arrangement or CVA Frequently asked questions

1st December, 2021
Keith Steven

Written ByKeith Steven

Managing Director


07879 555349

Keith is the author of the content on this comprehensive rescue, turnaround and insolvency website. He has expert knowledge on the company voluntary arrangement (CVA) mechanism

Keith Steven

These questions and answers will give a more detailed background to the technique. If you have any further general or specific questions email us by clicking here

These questions are the ones we hear most regularly – remember your situation will be unique to you, so call us on FREE phone 08009700539.

Q: If we propose a CVA what will the banks reaction be?

A: In our experience if the bank is presented with a vague “we might do a CVA” approach they will become very worried, very quickly. As you will recall from the CVA guide page, preparing the CVA is the job of the directors and their advisors. A properly structured and pragmatic deal that is based on reasonable assumptions will be much more acceptable to the bank. In other words, prepare the draft CVA with your turnaround practitioner and try to build an outline for dealing with the secured creditors. Then approach the bank. The local branch manager must pass the proposal to his/her debt recovery unit and cannot (usually) affect the outcome of the deal – if he/she understands the business well and is friendly he/she will probably support the deal.

Remember, the bank is (usually) secured, therefore the CVA cannot bind the bank in legally, but conversion of the overdraft into a longer term loan may give the bank more comfort that the company is keen to repay the debts. Talk to a turnaround practitioner who is used to dealing with banks.

Remember banks are in the business of financing and helping customers not knocking them over unnecessarily!

Q: Will I be able to get finance for my company if it is in CVA?

A: Yes you will but it may be more expensive as the company is deemed as a bit riskier but there are lenders who are prepared to do it.  See our page on funding your company in a CVA on our sister site.

Q: Someone told me that if we do a CVA the company has to pay back 100p in the 1 or the tax people will reject the proposal, is that correct?

A: NO! The amount the company pays back should always be based upon affordability, not some arbitrary number. We always work out a 5 year programme with supporting and highly detailed forecasts. Then the result is a better structured longer lasting CVA.

The HMRC people will be happier to support that plan than a half baked scheme that takes the total unsecured and tax debt and divides it by 24 months to get a simple 100% repayment. This method is doomed to failure!

Under the law there is NO minimum payment or dividend, as it is known. The law simply lays out a method for offering a deal to the company’s creditors. In our CVA deals the average is under 40p in 1 repayment 97% of those deals have been approved.

Q: I don’t think that my creditors will continue to supply me if I go into a CVA?

A: This is the most common worry. But YES they will supply you. They need to maintain their sales to your company, as much as they don’t like losing the money owed. We spend a lot of time on creditor liaison. By carefully explaining what the company is doing, how it will be in their best interests and asking them to work with the company and ourselves, we ensure that creditors are kept informed and on side. Don’t expect any credit terms or any favours. But being honest and open with them pays dividends in the long run.   In the end not paying your suppliers on time and having them issue threats is even more detrimental to your business.  If we think you can pay them back completely over time then we can always look at a time to pay arrangement whereby we do a deal to pay back all of the debt over an extended period.  Also, do not forget that a CVA can be 100p in the £1 and that is binding on all other creditors.

Q: If we propose a CVA what will HMRC do?

A: HMRC has a duty to consider the deal. The normal process is for the turnaround practitioner to call HMRC and say a CVA is being prepared. The collector or debt recovery unit will then pass the file to the central voluntary arrangement department in Worthing. They will consider the document very carefully and vote accordingly. They will not (usually) collect any tax and NIC between notification and the creditors meeting.

Q: Should I tell my best customers?

A: There is a view (which we share) that the key trading “partners” of our business should be aware of what is going on. I think a controlled approach (once the deal is proposed) to key customers will be much more beneficial than allowing them to hear “through the grapevine”.

Q: We are about to sign a new contract with a very important customer – if we propose a CVA what should we do about them?

A: Often clients think that the new contract is dependent upon the quality of your product and or service, but the customer will be checking the company’s ability to fund itself and to be in business some months or even years down the line. Again a concerted and controlled approach (typically led by the turnaround practitioner) will often generate positive results. Talk to your advisors about this and decide on appropriate action.

Q: What will my creditors think?

A: Of course they will be disappointed – think what your reaction is when a customer fails, but with the correct approach they will understand. Perhaps they realise that you have been under pressure for a while and that by proposing a CVA you are trying very hard to protect the business. By proposing a CVA you are demonstrating that you are trying to maximise creditors interests so it can often be viewed positively

Q: Should I involve my employees will they walk out?

A: It is our opinion that you must involve them when the time is right, they’re the people who are going to help deliver management’s plans.

A: Not unless they want to suffer financial hardship. Voluntarily leaving will negate their chances of benefits. If they have a new job to go to there is little however to be done to stop disgruntled employees leaving. But if the employees can be involved as part of the recovery – perhaps by offering a share package as part of the long term strategy, the key employees can often be retained.

Q: A Bailiff or Sheriff has a controlled goods order, if we propose a CVA what should I do about that?

A: It is all about communication. We would advise talking to them when the time is right, gently pointing out that the assets actually are charged to the bank (or other secured creditor) and that the company is seeking to maximise all creditors interests by proposing a CVA. They will listen if talked to in a mature way. Payment of their outstanding costs can often remove the pressure whilst not actually paying the petitioning creditors debts.

Q: The business is viable but why do a CVA – why not just “dump it”?

A: If you are determined to liquidate and start again perhaps even the strong economic arguments against liquidation are above your head. Remember the goodwill, tax losses; costs of liquidation, increase in creditors claims and reduction in value of assets are powerful arguments to preserve a viable company. You also have a legal and moral responsibility to maximise your creditors interests.

The risks of dumping it to avoid paying your creditors include – disqualification as a company director, being made personally liable under the Companies, Insolvency and Criminal Justice Acts, and being pursued for any misfeasance or wrongful trading. Of course the risks are small but you should carefully consider and weigh them up.

Q: What happens to my Personal Guarantees if we propose a CVA?

A: They are guarantees that cannot be removed unless and until the debt is paid off. The longer term repayment to secured creditors should be considered as part of the overall restructuring. Once the debt is cleared there is no reason why PGs cannot be removed.

Q: We have big tax losses – won’t we lose them in a CVA?

A: No.

Q: Can the company be protected from an aggressive creditor while we propose the CVA?

A: Yes there are two methods, one relies on case law and the other on the new Insolvency Act 2000. For a full explanation of how the new Acts moratorium process works talk to a turnaround practitioner or an insolvency practitioner. In case law, providing a creditor has less than 25% of the overall debts of the company then they can be required to consider the proposal even when a winding up petition is issued. (Dollar Land Feltham & Ors)

Q: Can we continue to trade while we propose the CVA?

A: Provided it maximises creditors interests, it is essential to keep trading.

Q: What happens to the HMRC payments?

A: See answers to HMRC questions above. You will need to continue paying PAYE and VAT going forward as you will need to show that the business is viable.  It also helps goodwill and increases the likelihood of them voting in favour of the proposal.

Q: Is it expensive? How do we pay the cost of a CVA?

A: In comparison to other forms of insolvency, no it is not expensive. Individual circumstances determine the costs; but do speak to a turnaround practitioner or an insolvency practitioner about this area. Because payments to the Crown and other non essential creditors are suspended whilst putting the deal together, cash flow often improves allowing payment. However, many IPs and practitioners will consider spreading the cost of their work to match cash flow ability.

Man with umbrella

What Is A Winding Up Petition By HMRC or Other Creditor

A winding up petition is a legal notice put forward to the court by a creditor. The creditor petitions to the court if they are owed more than £750 and it has not been paid for more than 21 days. The application, in effect, asks the court to liquidate the company as they believe the company is insolvent.

Read
What Is A Winding Up Petition By HMRC or Other Creditor
Balloon

Notice of Intention To Appoint Administrators

A notice of intention to appoint administrators is when the company files a document to the court to outline that it intends to go into administration if a solution cannot be found to its immediate financial problems. It can be used as part of the pre-pack administration process as well as used to restructure a failing business to avoid its liquidation.

Read
Notice of Intention To Appoint Administrators
Man with balloon

What Does Going Into Administration Mean?

Going into administration is when a company becomes insolvent and is put under the control of Licensed Insolvency Practitioners.  The directors and the secured lenders can appoint administrators through a court process in order to protect the company and their position as much as possible. Going Into Administration - A Simple Guide Administration is a very powerful process for gaining control when a company has serious cashflow problems, is insolvent and facing serious threats from creditors. The Court may appoint a licensed insolvency practitioner as administrator. This places a moratorium around the company and stops all legal actions.The administration must have a purpose and the Government encourages the use of company rescue mechanisms after administration. The 3 purposes (or objectives) of Administration Rescuing the company as a going concern. (Note: this purpose is to rescue the Company as opposed to rescuing the business undertaken by the Company.)Company rescue as a going concern – this is usually a  company voluntary arrangement. The company enters protective administration and is then restructured before entering into a CVA. The CVA would set out proposals for repayment of debts to secured, preferential and unsecured creditors. When the company has its CVA approved by creditors, then the administration process comes to an end after 28 days. Achieving a better result for the company's creditors This is as a whole than would be likely if the company was to be wound up (liquidation) See the differences between Administration and Liquidation.  This better result is usually obtained by selling the BUSINESS as a going concern to one or more buyers. The company and the debts are “left behind”. The better result may include securing transfer or employees under TUPE, as well as selling goodwill, intellectual property and assets. Controlling and then selling property/debtors. This is called realising assets. Then the administrator makes a distribution to one or more secured or preferential creditors, in order of creditors priority. Usually the business ceases trading and employees are made redundant.Only if the first two options are deemed unattainable, can the administrator use this third option.Under the administration option, it is possible for the company and its directors (or a creditor like the bank) to apply to the court to put the company into administration through a streamlined process.However, the law requires that any finance provider (like a bank or lender), with the appropriate security, is contacted and the aims of the administration be discussed and approved. The finance provider must have a fixed and floating charge (usually under a debenture) and the charge holder will need to give permission for the process to go ahead. Five days clear notice is required.  Be aware, though, that a secured lender can appoint administrators over a company without notice if it thinks its money is at risk.  So communication with the secured lender is essential.  

Read
What Does Going Into Administration Mean?

What is Receivership?

in What is …? What is receivership?

Understanding Receivership: Receivership, also known as administrative receivership, is a legally sanctioned procedure where an entity, typically a lender like a bank, appoints a receiver. The primary role of this receiver is to "receive" and liquidate the company's assets, if necessary, to repay the lender. This process is particularly beneficial to creditors as it aids in the recovery of defaulted funds, potentially preventing the company from facing liquidation The introduction of a receivership simplifies the lender's task of securing owed funds in cases of borrower default.Receivership should not be confused with administration and a receiver can only be appointed by a holder of a qualifying floating charge created before September 2003. Changes to this procedure were brought in by The Enterprise Act 2002 which promoted company rescue and saving struggling businesses. Why would a company go into receivership?The company requires finance for its activities and borrows from a bank (or other secured lender). In consideration for providing the loan, the bank requires security. Normally the company will sign a debenture with a fixed and floating charge. This offers the bank security over the assets of the company. If the terms of the agreement are breached or the company does not conform to the bank's wishes, the charge holder can:Appoint investigating accountants to ascertain how secure or not the bank's debt is and determine the best route forward (not always receivership). Demand formal repayment of the loans without notice. Appoint a receiver to administer and receive the company's assets.The receiver has a duty to collect the bank's debts only,they are not generally concerned with the other unsecured creditors or shareholders' exposure.Receivership - A typical appointment Having borrowed against a business plan that has not worked, a company finds that it is suffering cashflow problems. In an effort to survive, the company reports its problems to the bank and the bank asks for more information on the problems the company faces. Struggling with the problems of firefighting, the directors find it difficult to produce the information. Often the accountancy and reporting systems are not robust and a lot of time is needed to work out where the company is going, what the depth of the problems is and the necessary reporting to the bank is delayed.As time goes by, the company's overdraft is constantly at its limit, because monies don't come in fast enough from customers. Clearly this should set alarm bells ringing at the company - it most certainly does at the bank. They call this ceiling borrowing, and take it as a sign that the directors are losing control.  When this happens the bank will review the account and will typically take some or all of the following steps: What the Bank will doThe bank will ask for a reduction in its exposure. It will ask for increased security from the directors or shareholders. Usually this takes the form of personal guarantees to support the security that the company has given through the debenture. It may ask for new capital to be introduced by the shareholders. Problem is though, occasionally, this only has the effect of reducing the bank exposure as the bank takes this cash to reduce the borrowing. It can ask for a new business plan from the directors, along with regular reporting. It may ask for the company to consider receivables finance (factoring) to remove its borrowing and move to a factor. Often the bank's own factoring company. If they are still not satisfied that the directors are in control and if the bank is concerned about its exposure it will ask for investigating accountants (or reporting accountants) to look at the business. Normally this is a large firm of accountants who send an insolvency practitioner (IP) into the business to ascertain:Is the business viable? Is the company stable? Does it have a long term future if the present difficulties can be overcome? Is the bank's exposure sufficiently covered in the event of a failure? In this report the IP calculates what the assets of the business are worth on a going-concern basis and in a forced sale scenario (or closure basis). Investigating accountants often recommend that the bank sticks with the business, but that the bank should limit any further borrowing to the fully secured variety - in other words the directors must secure it personally against property for example. If the IP thinks that the company is in serious risk of failure and that the banks may lose money in that event, he/she will usually recommend to the bank that they appoint a receiver or administrator. Usually the bank (bizarrely) requires the directors to "request the bank to appoint a receiver". This is face-saving, and designed to deflect criticism from the bank to the directors.At Company Rescue, we believe that it is wrong that the insolvency practitioner that carries out the investigation could also be the receiver - We think it is essential that his/her role as investigating accountant is limited to just that. However, fortunately most banks now agree that this is not a good approach. Once they are appointed what is the receiver's role and powers?A receiver will quickly ascertain what the prospects for business are and decide whether to sell some or all of the assets, the business as a whole, or to continue to trade whilst a better deal can be achieved. Because of the rules and case law, he may wish to get rid of the assets and staff as soon as possible. (They will have to adopt employment contracts 14 days after the appointment). They may remove directors and employees without impunity. They ultimately decides the way forward and will (often) not take advice from the directors. They must pay the preferential debts (employees claims for arrears of pay and holiday pay) first from any floating charge collections. If a deal is to be done with directors the receiver must first advertise the business and its assets for sale. They must conform to the tight rules and regulations governing receivership and report to the DBEIS. A receiver must investigate the conduct of the directors of the business and file a report with the DBEIS.Disadvantages of Receivership The company is rarely saved in its existing form. Its assets will be subject to "meltdown" ( most people know that in receivership or liquidation assets are sold at a knock down price), often jobs and economic activity are lost.The directors will typically lose their employment and any monies the company is due to them, and the company may cease to trade. In addition the director's conduct is investigated.From the creditors' perspective, it is unlikely that any unsecured creditors will receive any of their money back and often they lose a valuable customer. Clearly the cost of receivership can be very high and the bank has to underwrite the receiver's costs. Advantages of Receivership The bank can take control where directors have maybe lost control. The receiver also has power to act to save the business quickly. The bank can ensure that its exposure is (at least) not increased and hopefully recover all of its money. For directors, the advantages are that it mitigates the risk of wrongful trading and may crystallise a very difficult position allowing them to get on with their lives.Preferential creditors may see their debts repaid by the receiver.Still got questions? Click here for Receivership FAQs. If there are still unanswered questions contact us by email or call 08009700539.If your business is in trouble and the relationship with the bank is breaking down, we suggest that you look carefully at the guides in this site. Receivership may be an option. Work out the viability of the business - can you trim costs? Work out the problems, set out the position and have a meeting of directors. Decide if the business can continue but needs to be restructured or if just not viable then consider administration or if the company's lenders have a debenture pre-dating 2003 then receivership.Please call us on 020 7887 2667 (London) or 08009700539 to talk to an expert turnaround advisor if you would like to talk through your company's options.

Read
What is Receivership?

Related Guides

Related News

Worried Director? We Can Save Or Restructure Your Company!

Call now for free and confidential advice