A Company Voluntary Arrangement (CVA) can help a viable company deal with debts it cannot currently afford while continuing to trade. For directors, the questions quickly become practical:
- Will suppliers keep supplying?
- What happens to the bank?
- How will the company afford its payments?
This guide answers questions raised in a discussion with our turnaround team. It covers preparing a CVA, managing the relationships the business depends on, and what happens once an arrangement is approved. The answer in an individual case depends on the company’s circumstances, contracts, and the terms of its proposal.
Suppliers and payments
Can we stop paying creditors while a CVA is being prepared?
Preparing a CVA does not automatically give the company protection from creditors or permission to stop paying every bill.
The company must agree on a payment strategy with its insolvency advisers.
The immediate task is often to preserve enough cash to keep the viable part of the business trading. That may mean buying essential new supplies on a cash or pro-forma basis while advisers negotiate with creditors over existing arrears. New trading costs and historic debts need to be considered separately.
Directors should avoid making ad hoc decisions about who gets paid. The advisers need a complete picture of creditors, security, threatened enforcement and available cash so that payments can be considered in the interests of creditors as a whole. Simply announcing an intention to propose a CVA does not prevent a creditor taking action.
Will suppliers continue supplying us if they are included in a CVA?
They may do so, particularly where they want to retain the company’s future business and can supply without extending further credit.
Continued supply should nevertheless be discussed rather than assumed.
For example, a supplier owed money for earlier deliveries may agree to provide new goods on pro-forma terms. The company pays before delivery, so the supplier’s exposure does not keep increasing. The historic claim is dealt with under the CVA’s terms.
Clear communication helps suppliers assess the plan. They will want to understand how new orders will be paid for and why the company is expected to survive. The cash-flow forecast should allow for the possibility that suppliers will offer little or no credit initially. A business that depends on immediately recovering its previous credit terms may need more working capital than its directors expect.
Can essential suppliers be paid differently from other creditors?
Sometimes different treatment can be justified where retaining a particular supplier is essential to the rescue and benefits creditors overall. Website hosting, specialist IT or a supplier with no practical replacement may raise this issue.
However, describing a supplier as essential does not automatically allow its old debt to be excluded or paid in full. The commercial reason, alternatives, legal position and effect on other creditors must be assessed. Any proposed different treatment should be explained transparently in the proposal and considered for unfair prejudice and other insolvency risks.
There are also statutory restrictions on terminating certain supply contracts because of insolvency, subject to exceptions. Advisers should check whether those protections apply before assuming a supplier can demand payment of all arrears to continue. Paying for new supplies and paying historic arrears are separate questions.
Banks and finance
What happens to our bank overdraft?
A bank may review, reduce, or withdraw an overdraft when it learns a company is in financial difficulty. A CVA does not guarantee that the facility will remain available.
The bank should therefore be part of the restructuring plan. Directors and advisers need to explain what has gone wrong, what will change and how the business will fund its future trading. The timing of that conversation depends on the circumstances and any notification obligations. An urgent problem may require immediate contact, even before the full proposal is ready.
The forecast should also test whether the business can operate with a smaller overdraft or a different source of working capital. Invoice finance may be an option for some companies, but its availability and suitability need to be established rather than assumed.
Are secured lenders bound by the CVA?
A CVA cannot affect a secured creditor’s right to enforce its security without that creditor’s agreement.
Secured borrowing therefore needs separate attention when planning the rescue.
The company may need to continue making contractual payments or negotiate changes, such as a temporary payment holiday. A lender can consider whether supporting the rescue is likely to produce a better outcome than enforcing its security, but it is not obliged to accept the directors’ preferred approach.
Advisers need to examine the security documents and identify any unsecured shortfall as well as the secured element. The proposal, forecast and lender discussions should reflect the actual position. Directors should not assume every bank debt is fully secured or that CVA approval removes the lender’s enforcement rights.
What happens to factoring or invoice finance?
An invoice-finance facility can be central to a company’s ability to keep trading. The provider may control collections from customers, hold security and have contractual rights triggered by financial distress or a proposed CVA.
The company should discuss whether the provider will maintain funding during preparation and after approval. The forecast needs to reflect realistic drawdown levels, charges, reserves and any restrictions the provider requires.
If the existing provider will not continue, replacement funding may be possible. That is a separate funding exercise: a new provider will assess the debtor book, customer quality, business prospects and security arrangements. A CVA may reduce historic creditor pressure, but it does not guarantee finance. Directors should also check any personal guarantee or indemnity associated with the facility.
Does a CVA remove my personal guarantees?
Normally, no. A CVA deals with the company’s liabilities. A personal guarantee is a separate obligation given by an individual, and a compromised company debt does not usually release that obligation.
The lender’s ability to claim, the amount recoverable and when payment can be demanded depend on the guarantee and related documents. Security realisations and payments received through the CVA may affect the outstanding balance; the lender cannot recover more than it is entitled to.
Directors should provide their advisers with copies of every guarantee and indemnity early in the process. Personal exposure needs to be considered alongside the company rescue. Depending on the circumstances, separate negotiations over repayment or settlement may be possible, and the director may need independent personal insolvency or legal advice.
Will a lender call in my personal guarantee immediately?
It may be able to make a demand promptly, depending on the documents and events that have occurred. There is no automatic period of grace while a CVA is prepared.
In practice, a lender may agree to wait for the proposal or discuss repayment terms with the guarantor. Knowing the likely company dividend can help those discussions, but negotiations do not themselves suspend the lender’s rights.
In some cases, directors can negotiate repayment of their personal exposure over time while the company continues with its CVA. That is a possible negotiated outcome, rather than an entitlement. Do not ignore a demand or assume that the company advisers are also acting for you personally. Confirm who is advising on the guarantee and respond within any relevant deadlines.
HMRC and creditor returns
Why would HMRC support a CVA when it is demanding immediate payment?
HMRC’s debt collection activity and its assessment of a formal CVA proposal serve different purposes. Receiving payment demands does not necessarily mean that HMRC will reject a rescue proposal.
HMRC’s Voluntary Arrangement Service considers proposals case by case. Its published criteria emphasise realistic prospects of success, up-to-date returns, an achievable offer and payment of future tax in full and on time. The proposal must explain the earlier non-payment and what will change.
Preparing a proposal does not automatically stop enforcement. Advisers need to liaise with HMRC during that period, and a pause cannot be guaranteed. The practical task is to demonstrate a credible rescue while addressing immediate collection risks.
Are VAT, PAYE and Corporation Tax treated the same in a CVA?
No. HMRC can have both secondary preferential and ordinary unsecured claims.
VAT, PAYE income tax, employee National Insurance contributions and certain other deductions have secondary preferential status. Corporation Tax and employer National Insurance contributions do not. HMRC penalties and interest are also generally non-preferential.
The distinction affects the proposed creditor return. HMRC’s published policy expects preferential debts to be paid in full before distributions to non-preferential unsecured creditors. Directors should not assume that an offer of 30p or 50p in the pound applies to the whole HMRC balance.
The tax debt must be broken down accurately when the proposal and estimated outcome are prepared. This can have a substantial effect on whether the company can afford a CVA.
Why would creditors accept less than the full amount owed?
The realistic comparison is often between the proposed CVA return and the amount creditors would receive if the rescue did not proceed. That alternative might be liquidation or administration.
For example, a proposal may estimate a return of 40p in the pound for ordinary unsecured creditors over its term, compared with a much smaller return in liquidation. Creditors still suffer a loss, but the CVA may offer the better commercial outcome. They may also retain a customer for future business.
The comparison must be supported by credible information about assets, liabilities, costs and trading prospects. A higher forecast dividend is of little value if the company cannot deliver it. Equally, a CVA does not always involve writing off debt: some arrangements provide for full repayment over time.
How is the company’s CVA contribution calculated?
The starting point is what the restructured company can sustainably afford, rather than selecting an arbitrary percentage of its debts.
Forecasting examines future sales, margins, staffing, premises and working capital. It should test changes such as losing a customer, paying suppliers upfront or reducing the number of sites. Those assumptions need to be realistic and supported by the directors’ understanding of the business.
Accounting profit is not the same as available cash. The company must still pay ongoing tax, wages, essential suppliers and other new liabilities. It also needs to fund the costs of the arrangement and any separately agreed lender payments.
The proposed contribution should leave sufficient headroom for ordinary trading setbacks. The estimated dividend then depends on the contributions, other funds available, costs and the treatment of different creditor claims.
What happens to the part of a debt that is not repaid?
The approved CVA determines how affected debts are compromised, when any release takes effect and what happens if the arrangement fails. Directors should understand those provisions before approval.
For example, an arrangement might offer ordinary unsecured creditors an estimated 50p in the pound. Creditors bound by it must deal with their affected claims under its terms rather than insist on their original payment timetable. The treatment of the balance follows the proposal; it should not be described as automatically and permanently written off on day one in every CVA.
The estimate may also change if claims differ from expectations or the proposal includes additional contributions. A company debt compromise does not normally release a third-party guarantor. Creditors’ accounting and tax treatment is a separate issue for their own advisers.
Employees, customers and premises
Should I involve my employees will they walk out?
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.
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.
Can employees be made redundant as part of a CVA?
Yes, restructuring may involve redundancies where the company needs a smaller workforce to become viable. Entering a CVA does not remove employment-law obligations.
The company must consider the appropriate consultation, selection and notice procedures, including collective consultation requirements where applicable. Directors should take employment advice before implementing changes.
Employees who leave may have claims for wages, holiday pay, notice and redundancy. The treatment depends on the type of claim, when it arises and the arrangement’s terms; not every employee claim has the same insolvency ranking.
Communication matters. Employees need a clear explanation of what is happening, what they may be owed and how any claims will be handled. The purpose of reducing employment costs is to protect a viable remaining business, but the process must still be carried out properly.
Who pays redundancy and notice if the company cannot afford them?
Where the statutory conditions are met, eligible employees may claim certain payments through the Insolvency Service’s Redundancy Payments Service.
These can include statutory redundancy, qualifying wage arrears, holiday pay and statutory notice pay, subject to the relevant limits and rules.
It is not a guarantee that every contractual entitlement will be paid in full. Eligibility, the timing of dismissal, statutory caps and deductions all matter. Any unpaid balance and the government’s resulting claim need to be considered in the insolvency process.
The insolvency practitioner should explain the claim route, provide the necessary case information and confirm which claims qualify in the particular circumstances. Directors should not promise employees a payment amount or date before this has been checked. The forecast and proposal should also allow for the resulting claims.
Can we remove a director or senior manager to reduce costs?
Potentially, but employment and holding office as a statutory director are separate matters.
Ending a person’s employment does not automatically remove them from the board. Equally, removing them as a director does not necessarily bring their employment contract to an end without further consequences.
The company needs to consider the employment contract, articles, any shareholders’ agreement and the relevant company-law procedures. A director may also be a shareholder, which adds another relationship to address.
The forecast may show a clear commercial need to reduce management costs, but that does not replace the correct legal process. Take appropriate advice before acting and assess the timing and treatment of any resulting claims. A CVA should not be assumed to compromise every future employment or legal claim automatically.
Will customers find out about the CVA and should we tell them?
A CVA becomes public information, so directors should plan on the basis that customers may learn about it.
Important customers may prefer to hear a clear explanation directly from the company.
The communication plan should reflect the relationship, contractual notification obligations and the importance of that customer to future trading. Some customers may require reassurance about delivery, service continuity or advance payments. Others may have contractual or regulatory requirements that need separate attention.
A useful explanation sets out what is changing, how the rescue will support continued service and what advice the company is receiving. Advisers can help directors prepare for questions or attend key meetings.
Keeping customers depends on continued performance as well as communication. Avoid promising that nobody will leave; assess customer retention realistically in the forecast.
Can a CVA help us leave an expensive property lease?
It can help restructure certain lease liabilities, but approval does not automatically surrender every unwanted lease or remove every property obligation.
The proposal may address rent arrears and future liabilities associated with premises the business no longer needs. The effect depends on the lease, the proposal and the landlord’s rights. Legal advice is needed on how occupation will end and which obligations can be compromised.
Landlord claims may include arrears, future rent, service charges and dilapidations. Security, guarantees and rights against other parties need separate consideration. Business rates should also be assessed separately: leaving premises or proposing a CVA does not automatically end all rates liability.
The forecast must reflect a legally workable exit plan. Directors should not remove every future property cost simply because they intend to vacate the site.
What happens to rent arrears and the landlord’s future claim?
Historic rent arrears may be dealt with as an affected claim under the CVA. Future lease liabilities require separate assessment and careful drafting.
The landlord’s claim and voting entitlement depend on the relevant rules and the facts, including the remaining lease term and assumptions about reletting. There is no universal rule that a landlord can claim or vote for only one year’s rent.
The proposal should explain how the landlord is treated and why the arrangement is justified. A landlord may challenge a CVA on grounds such as unfair prejudice or material irregularity.
Early discussion can help clarify the intended exit, the property’s condition and whether a surrender can be agreed. The company should not assume that the landlord’s acceptance of keys resolves every outstanding liability.
Creditor enforcement
What happens if the company already has a CCJ?
An existing County Court Judgment needs attention when planning a rescue. Proposing a CVA does not automatically stop its enforcement or erase the judgment from the record.
If the underlying debt is bound by an approved CVA, the creditor’s ability to pursue payment must be considered in light of that arrangement. The judgment itself, the debt and the enforcement position are related but distinct issues.
Advisers need to establish whether enforcement has begun, whether any assets are affected and whether an interim agreement or court application is needed. Directors should provide copies of the judgment and all enforcement correspondence promptly.
The practical aim is to manage the immediate risk and ensure the proposal deals accurately with the creditor’s claim. Do not assume that preparing the CVA allows court deadlines to be ignored.
What if a creditor threatens or presents a winding-up petition?
Obtain specialist advice immediately. A threat may offer an opportunity to negotiate, but an actual petition changes the position significantly.
In England and Wales, if a winding-up order follows, dispositions of company property after presentation of the petition can be void unless the court orders otherwise. This can affect payments, trading and access to bank accounts. A validation order may be required for particular transactions.
Preparing a CVA does not automatically stop a petition, and a validation order does not dismiss it. Advisers need to consider the court timetable, funding and whether a CVA remains achievable or another procedure is needed.
Provide the petition and associated correspondence as soon as they arrive. Procedure differs across UK jurisdictions, so the response must reflect where the company and proceedings are based.
Directors and the running of the company
Do directors remain in control during a CVA?
Normally, yes, where the CVA is used for a company operating under its directors’ control. The directors continue to run the business and remain responsible for its decisions.
The insolvency practitioner acts as nominee during the proposal stage and supervisor once the arrangement is approved. Advisers help test viability, prepare the turnaround plan and explain the available options. The supervisor oversees compliance with the arrangement rather than routinely taking over day-to-day management.
The proposal may impose reporting requirements and restrictions, and directors must comply with them. If the CVA is proposed while the company is already in administration or liquidation, the existing office-holder’s role also needs to be considered. Directors retaining control does not mean they can operate without regard to the CVA or their duties to creditors.
What happens to money a family member or I lent to the company?
A genuine loan to the company can give the lender a creditor claim. Whether it is repaid depends on any valid security, the creditor’s relationship with the company and the CVA’s terms.
Directors and certain relatives or associated businesses may be connected creditors. This can affect voting safeguards and the treatment required by other creditors. A proposal or creditor modification may defer, subordinate or exclude repayment of connected loans.
HMRC may seek modifications restricting repayment of connected creditor claims. That should not be treated as the inevitable result in every CVA; the actual proposal and modifications need to be checked.
Disclose these loans fully, with their supporting documents. A director’s loan account in credit is different from an overdrawn account, where the director owes money to the company.
Can directors continue taking dividends during a CVA?
Directors should not assume that their previous salary-and-dividend arrangement can continue. Dividends require profits legally available for distribution, and the CVA may impose additional restrictions.
Money drawn during the year in anticipation of a later dividend can leave an overdrawn director’s loan account if a lawful dividend cannot be declared. That balance is an asset of the company and must be disclosed and addressed.
The restructuring forecast should provide for appropriate remuneration, its tax costs and any repayment of money owed by directors. Creditors may require changes to remuneration or restrictions on distributions as part of approving the proposal.
The issue is not simply whether there is cash in the bank. Directors need accounting and insolvency advice on distributable profits, creditor interests and the actual terms of the arrangement before taking dividends or further drawings.
Contributions completion and alternatives
What happens if the company performs better than forecast?
The proposal determines whether better performance increases the company’s contributions.
Some arrangements specify fixed payments. Others contain a profit ratchet or similar mechanism requiring additional payments if performance exceeds an agreed level. Asset realisations or other receipts may also be covered by specific provisions.
Directors should understand how any additional contribution is calculated and when it becomes due. Reported profit, cash generated and funds available for reinvestment are different measures, so the wording matters.
Better trading may lead to a larger creditor dividend, additional cash retained by the business or both. It does not automatically entitle directors to distribute the surplus to shareholders. The supervisor can explain how the agreed terms apply as results become available.
Can we complete the CVA early?
Potentially. Stronger trading, refinancing or new investment may make early completion or a full-and-final settlement possible.
The first step is to examine the arrangement’s terms. Paying the remaining scheduled contributions may not be sufficient if there are profit-linked obligations, costs or other conditions still to satisfy.
Where a different settlement is proposed, a variation and creditor consent may be required. The supervisor should confirm the process and explain what approval and completion documentation are needed.
Directors should discuss this before committing to new funding or assuming the arrangement has ended. The settlement must address the company’s remaining obligations and any conditions attached to release of affected debts. HMRC’s published guidance objects to terms permitting early completion without creditors’ consent.
What happens if we miss a payment or cannot afford the contributions?
Contact the supervisor promptly. The consequences depend on the arrangement’s default provisions, any opportunity to remedy the breach and whether a variation is available.
Directors cannot simply reduce payments unilaterally. Changes may require creditor approval and may be restricted by the proposal or modifications. There is no universal statutory rule preventing changes to every CVA during its first twelve months.
The supervisor and directors need to establish whether the problem is temporary or shows that the business is no longer viable. Updated forecasts should include ongoing tax and new trading liabilities as well as CVA contributions.
Persistent default can lead to termination and another insolvency procedure. The treatment of previously compromised debts on failure depends on the terms. Affordable initial contributions and realistic headroom are therefore central to a credible proposal.
What if the company cannot afford the fees to prepare a CVA?
Inability to pay fees weekly when other payments to creditors stop calls into question whether a CVA is viable!
The company should agree the scope, fees, payment schedule and funding with its advisers. Preparation fees may be spread over several weeks where agreed, but the payment terms depend on the engagement. Preparation, nominee and supervision costs all need to be understood.
An immediate cash shortage does not, on its own, prove that the business is unviable. It may reflect timing or a funding gap. However, if the company cannot fund essential trading, the rescue costs and future obligations even after realistic restructuring, the directors need to reconsider whether a CVA is achievable. Funding uncertainty should be resolved before the company commits to the plan.
When is liquidation or administration more appropriate?
A CVA needs a viable underlying business and a credible way to fund both ongoing trading and the arrangement. It cannot solve a permanent inability to generate sufficient cash.
If restructuring still leaves the company unable to meet those obligations, liquidation or administration may be more appropriate. An informal agreement, refinancing or a sale may also need to be considered, depending on the circumstances.
Liquidation deals with closing the company and realising its assets. Administration has different statutory purposes and may involve rescue or a business sale. The company closing does not always mean that every part of its business has no future, but any sale or transfer requires proper advice.
The decision should follow an assessment of viability, funding, creditor outcomes and immediate enforcement risks. Concern about a personal guarantee should not drive continued trading that worsens creditors’ losses.
What happens to personal guarantees if the company is liquidated?
Liquidation does not normally release a valid personal guarantee. A lender may pursue the guarantor under the documents for sums that remain recoverable.
The amount and timing depend on the guarantee, security and payments received from the company or other sources. Directors should not assume every guarantee is automatically payable in full on the same day, or that the company’s closure removes their exposure.
Separate negotiations over settlement or repayment may be possible. Where the exposure is substantial, independent legal or personal insolvency advice can help establish the options.
This personal position matters when comparing procedures, but the company’s directors must still act appropriately towards company creditors. A guarantee does not make an otherwise unviable company suitable for a CVA.
What risks do directors face if the rescue does not work?
A failed rescue does not automatically make directors liable for all company debts. The liquidator will examine their conduct and relevant legal duties.
When a company is insolvent, creditor interests are central to directors’ decisions. Directors should keep proper records, obtain advice, review the financial position and document the reasons for important decisions. Taking advice does not remove their responsibilities.
In a later liquidation, the liquidator examines the company’s affairs. Depending on the facts, issues may include wrongful trading, misfeasance, unlawful dividends, preferences or transactions at undervalue. These have different legal tests and consequences.
Keep forecasts, board minutes and records of the steps taken to protect creditors. If the evidence shows that the rescue is no longer realistic, reassess promptly rather than continue accumulating liabilities without a credible plan.
How do we know whether there is a viable business to rescue?
Test the business that will exist after restructuring, rather than assume that reducing old debt will be enough.
Can it generate sustainable cash from realistic sales and margins? Can it retain the customers, employees and suppliers it needs? Is there enough working capital if suppliers require upfront payment? Can it meet ongoing tax, lender commitments and new liabilities while funding affordable CVA contributions?
The directors must also be willing and able to implement the changes. A proposal based on cost reductions that never happen or sales growth with little supporting evidence is unlikely to provide a durable rescue.
The forecasting process brings these questions together. Where it identifies a viable core business and a better outcome for creditors, a CVA may offer a practical way forward. Where it does not, the alternatives deserve equally careful consideration.
Discuss whether a CVA could work for your company
If your company is under pressure from creditors but you believe there is a viable business to rescue, speak to RMT Accountants and Company Rescue. We can help you assess the financial position, explore the available options and understand what a workable CVA would require.
