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What is a CVA or Company Voluntary Arrangement? Let our experts explain.

18th April, 2024
Keith Steven

Written ByKeith Steven

Managing Director


07879 555349

He has rescued hundreds of companies and helped many of them turn around using CVA or pre pack. Could he help YOUR company?! Call him now 07833 240747

Keith Steven
man about to climb ladder

Table of Contents

  • Advantages of a CVA For Your Company
  • What are the disadvantages of a CVA?
  • A Summary of a CVA
  • A step by step process of putting a company into a CVA
  • What happens at the end of the CVA period?
  • How does a CVA affect the employees and directors of a business?
  • When might a CVA be appropriate for a company?
  • How much does a CVA cost?
  • See below a video explaining the CVA Process
  • Flowchart of the CVA process

Can we save your company with a CVA?

A CVA or Company Voluntary Arrangement is a powerful and legally binding agreement with your company’s creditors which allows a proportion of its unsecured debts to be paid back over time. To be approved, 75%, of the creditors, by value, who voted need to support the proposal.

Once the proposal has been approved then all unsecured creditors, are bound by the arrangement. The company can carry on trading as usual, and the directors remain in control. The CVA is monitored by a supervisor who has to be a licensed insolvency practitioner. The arrangement usually lasts for 3-5 years. We have two highly experienced CVA supervisors who have overseen nearly 500 CVAs since 2000.

A CVA arrangement usually lasts for 1-5 years. Sometimes companies can outperform their forecasts and exit the arrangement sooner. Sometimes the CVA period needs to be extended. Obviously not all CVAs will work. Being blunt they are extremely tough procedures to go through!

But, if your company can be viable, we think it is hugely important to try and restructure the costs and focus on driving its recovery. Only a CVA can do that quickly and with nil /modest cash outlay by the company to cut its costs.

In our opinion, a CVA is the best rescue tool for a company that is viable going forward but is burdened by historic debt. The directors, who remain in control, are able to trade the company out of its current financial problems, always provided that they have addressed the problems that caused the debts in the first place.

This page will help you to discover what a company voluntary arrangement does, understand how it works and how it can help you stop creditor pressure and turnaround your company.

Please have a good read through our helpful guides and information on this site. Then why not call our support centre on 0800 970 0539 for a no obligation confidential chat. We can help put your mind at rest immediately that there ARE options to solve your company’s debt issues.

Out of hours one of our senior managers or directors will be available to answer any emergency calls on 07833 240747

Read why we are the experts on this rescue mechanism

Advantages of a CVA For Your Company

  1. It can improve cash flow quickly.
  2. Stop pressure from HMRC tax, VAT and PAYE while the company voluntary arrangement is being prepared.
  3. It can help stop the threat of a winding up petition from HMRC, landlords or suppliers.
  4. The company can terminate employment, payment/compliance obligations under leases, onerous supply contracts and all with NIL CASH COST.
  5. Direct and overhead costs can be rapidly cut to rightsize the cost base.
  6. Allows your company to terminate property lease obligations and vacate premises with NIL cash cost (using our expertise) Want to know how to stop paying rent and rates on unwanted properties? Get in touch with our lease experts now.
  7. All money owed to tax and trade creditors, landlords and service creditors  is bundled up in one monthly payment to the supervisor, at an affordable level.
  8. You can remove employee’s roles without the need to pay redundancy payments or lieu of notice costs from precious cash reserves. These claims are then paid by the Government after the arrangement is approved.
  9. It is possible to terminate onerous customer/supplier contracts.
  10. Board and shareholders remain in control of the company.
  11. A CVA can have much lower costs than administration, a Restructuring Plan or a Scheme of Arrangement
  12. It is not publicly announced like administration.

Finally, it is ALSO a good deal for creditors as they retain a customer and may receive some of their debt back over time. It is important to note that VAT and PAYE must be paid back up to 100p in £1 first in a CVA over years 1-4 or 1-5, before all other unsecured creditors. Then trade and suppliers will usually receive between 5p and 100p in every £1 of their debts, depending on what your company can afford to pay back.

In special circumstances you we can hive the business up to a new clean company, and it can trade with customers and suppliers. The old company gets a management fee to pay the creditors back. This innovative restructuring needs to be carefully planned, why not call Keith Steven and discuss your thoughts on 07974 086779

What are the disadvantages of a CVA?

  1. The company enters a form of corporate insolvency.
  2. The company has no credit rating after the proposal is approved and until it completes. Careful management of cashflow is required and all of our CVA financial forecasts will initially assume nil credit terms.
  3. Regulated businesses CAN enter a CVA and be regulated. We will need to work with the Regulatory body to ensure it is happy with the plan. KSA Group has worked with every major Regulator such as the SRA, ICAEW, FCA, the Road Traffic Commissioners and many more.
  4. It is a stressful process for directors, management and business owners. Our team of experts can guide directors through the restructuring work required.
  5. Raising new capital can be difficult whilst the company is in a CVA, our sister business companyfundingoptions.co.uk are experts in raising new financial facilities to help.

As leading turnaround experts, who have been helping directors with innovative CVA plans since 1996, we thought we should put all (or almost all!) of our expertise and experience into this 79 page Experts Guide to CVA and give it away to worried directors who are considering their options. Please take time to read it, as its hugely powerful and helpful when planning how to restructure your business and drive a turnaround of your company’s performance using this powerful tool.

AND it is fast to download and more importantly it is FREE and you do not need to provide your company details to get it. Just click the link below.

DOWNLOAD OUR GUIDE TO Company Voluntary Arrangements HERE

A Summary of a CVA

A CVA is essentially a deal between the insolvent company and its tax and unsecured creditors. This deal places a legal ring-fence, called a moratorium, around the company and stops creditors attacking it. A CVA allows a viable but struggling company to repay some, or all, of its historic debts over time.

Our experienced advisors will work with secured lenders like banks (who’s debt remains outside of the CVA arrangement) to ensure that they are supportive of the debt restructure. It is vital to keep banks informed and involved, for a CVA to be successfully implemented. Our team can work with you on restructuring the bank’s debt too in certain circumstances.

The benefits for you are these. Directors stay in control of the company, with KSA Group providing support. It can stop legal actions like winding up petitions if you use a quality, experienced advisor like us. You can cut costs and restructure debts.

The directors need to be committed to saving the business. Also it allows the opportunity for the business to be sold if that is your preferred pathway. It can facilitate refinancing, raising new capital or M&A processes too.

The CVA process has been part of UK law since 1986 and is one of the Government’s preferred rescue options. A CVA is an alternative to a liquidation (CVL) or an administration.

In fact, recently the Government published a report that found that the mechanism was fair to creditors.  You can view the report here.

When might a CVA be appropriate for a company?

  1. The company must be insolvent.
  2. You can’t just write off some of the debt to try and improve profitability!
  3. The company must be viable in future if its costs are cut and the core business can recover.
  4. Many companies cannot survive due to historic debt. For instance, the company may have encountered a bad patch of trading or it may have suffered a bad debt from one of its own customers. In these circumstances you could use a CVA to reduce the debt and get time to pay some or all of the debts back.
  5. The company must have some predictable and regular income.  Speculative businesses that have big hopes (however realistic) for a big deal in the future may not be suitable!
  6. The directors need to have been compliant with tax and regulatory filings for the company.
  7. Reasonable financial controls need to be in place. We will need lots of accounting and management information to build a CVA proposal!
  8. Finally the directors must have the determination and drive to save the business.

A step by step process of putting a company into a CVA

 

Step 1 Appointment of Experienced CVA Advisors

Directors appoint advisors like turnaround practitioners or insolvency practitioners (IPs) such as KSA Group to assist in constructing the proposal. KSA Group is the owner of this website and it delivers class leading turnaround and insolvency advice, we build innovative CVAs, undertake prepack administration cases and perform many liquidations. We are regulated by the Insolvency Practitioners Association.

Before appointing any other turnaround or insolvency advisors to propose a CVA for your company, we suggest you ask them about how a CVA works and how many they have done for their clients. Most IPs avoid the CVA option, as it is very complex and difficult, preferring simpler liquidation work instead.

Step 2 Company Review

KSA Group will undertake a detailed review of the company, its people, markets, and systems. This includes preparing a detailed formal proposal to the company’s creditors, a statement of affairs, a comparison between liquidation, administration, and CVA outcomes for all classes of creditors. Our team of financial forecasting experts will assist the directors in building realistic and achievable forecasts. This involves questioning all financial information and estimating sales and margins conservatively​​. If your financial and accounting information is poor or non-existent, your company is not suitable for this process.

Step 3 Proposal Drafting Period

Whilst the proposal is being put together the company should not significantly increase or decrease debts to any creditor during this period. Suppliers should be paid for new supplies made, and the company’s operations continue as usual​​. During the CVA production or “hiatus” period, current assets such as WIP and debtors are collected. The process allows the company to reduce employment and overhead costs, which wouldn’t ordinarily be possible. This includes terminating employment contracts, exiting rental obligations, and reducing other onerous costs​​. The resultant and increased liquidity should be used to fund the difficult period between appointment of CVA advisors and filing the proposal document at court.

Step 4 Payments to HMRC

In addition, the company normally does not need to pay PAYE, NIC or VAT in the hiatus period as HMRC generally proves the debt to the date of the creditors meeting.  However, it is prudent to start paying these taxes if the CVA preparation is taking a long time as it demonstrates to HMRC that the company is viable going forward.

Step 5 Talk To Secured Creditors

Although the secured creditors are not bound by any CVA proposal it is a good idea to involve them rather than them finding out by other means.  If they can see that you are able to put the company on a stronger footing, they shouldn’t be too worried about their exposure. KSA will liaise with the directors and the secured lenders to ensure they are fully appraised of the proposed plans, the proposed financial and cost changes and the structure of the CVA plan.

Step 6 Proposal Finalisation

Once the draft CVA proposal is ready, it’s reviewed by the nominated CVA supervisor (who is also called a Nominee), who has to be a licensed insolvency practitioner, to ensure its appropriate, achievable, and maximises creditors’ interests.  They will separately and independently interview the directors as part of this assessment process and discuss the CVA plan in detail with the board.

Then the nominee or nominees will report to the creditors that they believe the CVA is “fit, fair and feasible” and it should provide the best outcome for all creditors. The nominee must also be prepared to act as the future CVA supervisor. This report is filed in the Insolvency and Companies Court and is given a Court Originating Application number.

Step 7 Creditor Consideration

After Court filing is complete, the proposal is sent to all creditors, who then consider it for a minimum notice period which is usually 17-28 days, before the decision-making process (creditors meeting)​​ is held. We usually provide the Nominees report and the CVA on our online portal, we send a letter and email to all listed creditors.  More information on how a CVA affects creditors

Step 8 Creditors Meeting and Voting

At the decision-making process (creditors 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 countback vote excluding connected creditors is taken and provided that not more than 50% of creditors voted against the proposal it is approved. Do remember it is not 75% of all creditors, it is 75% by value of those votes cast at that meeting.

 

Step 9 Shareholders Meeting

However, if creditors have approved the proposal, it is carried whether shareholders approve or not.

Step 10 Approval

If both meetings approve the proposal, the chairman issues a report to all creditors and the court. Once approved, all notified and included creditors are legally bound for the debt “frozen” in the proposal​​.

This means they cannot simply take legal action to chase the debt whilst the company is in CVA for old debts. However, new suppliers or debts must also be paid on time as they are NOT bound into the CVA.

Step 11 Payments to creditors

The company must make agreed contributions to a trust account administered by the supervisor. Failure to keep up with contributions can lead to the arrangement being aborted, usually resulting in liquidation or administration​​.

Provided the company conforms to the proposal and makes its monthly CVA contributions, then the CVA continues for the agreed period. The supervisor is generally not involved in the business. THE DIRECTORS REMAIN IN CONTROL.

In future, 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 changes to the CVA itself, also known as amendments. If the Supervisor has concerns, he can also ask the Court for directions. In most cases the directors should inform the supervisor EARLY 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.

How does a CVA affect the employees and directors of a business?

As a condition of a CVA being agreed there will no doubt be a demand that costs are reduced.  This can mean closing down of warehouses, shops etc with the loss of staff.  However, as mentioned before, the main purpose of a CVA is to AVOID terminal insolvency where there will be more job losses and the returns to creditors will be even less.  Management can be blamed for problems in the company and there may need to be changes at board level.  Often a Non executive director can be brought in with experience of turning around firms to lend expertise and help the directors survive the rigours of the CVA.  During a CVA it is standard practice that the directors do not have any pay rises and of course may agree to take pay cuts.

 

How much does a CVA cost?

This does depend very much on the following;

  • Total number of creditors.
  • Number of secured creditors like bank lenders.
  • Number of landlord or property issues.
  • Number of employees, and how many will be leaving.
  • The level of current (pre CVA) aggression by HMRC or legal actions by creditors.
  • What level of negotiation is needed.
  • The quality of your financial forecasts and how much preparatory forecast work we may need to do.
  • The quality of YOUR financial information and how much remedial work we may need to do.

We will provide a written quote for all required fees, before we commence working on the CVA proposal. This is provided in our unique Strategy Report which we will prepare FREE OF CHARGE once we have been provided with your company’s details and we have met.

In the end, a Company Voluntary Arrangement is a deal and doing a deal involves talking to people and the stakeholders in the business. It helps if the company has good financial information and there is not a compressed timetable due to aggressive legal actions by creditors. By acting early this can be generally avoided.

CONTACT US FOR A FREE MEETING

So that’s very helpful, how do we pay if we are in financial difficulty!?

Simply, once we are instructed all the creditors deal with us and we can effectively help the company to freeze payments to creditors until a deal is done. We take the creditor pressure away over time.

Working with our creditors liaison team we will discuss the proposed CVA with the creditors and this allows TIME to bridge the cashflow gap.

 

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… 

Speak to an expert now to see how we can help your cashflow recover.

In April 2024 18 companies entered a company voluntary arrangement as a way to restructure their debts and survive.

 

See below a video explaining the CVA Process

 

Flowchart of the CVA process

Flow Chart of CVA process