A CVA, or a company voluntary arrangement, is a formal insolvency agreement between an insolvent company and its creditors.
In a CVA, a business will pay towards its debts for an agreed period. Once completed, all remaining debts will be written off. With the recent introduction of the R3 Standard Form, CVAs are set to be easier to access than ever before.
So, if you’re wondering “how do I get a CVA?”, read on to discover how the process of applying for a CVA works, what makes a successful CVA, and how you can ensure your CVA proposal is accepted by your creditors...
So, how do I get a CVA?
If your company is insolvent, a CVA is a legal agreement that can help to reorganise its debts. A CVA is a formal insolvency process, which means you need to work with a licensed insolvency practitioner in order to enter into one.
Your insolvency practitioner will decide whether your business is viable and if a CVA is the right option for you, before drafting a proposal to send to your creditors. The creditors will then vote on the proposal – and if over 75% in value vote in favour, the CVA is accepted.
When is a CVA appropriate?
There are several important components that can determine whether a CVA is appropriate.
Firstly, the business must be viable and be able to return to profitability if given a suitable breathing space. Secondly, the agreement must be sensible and structured in a way that suits both your business and its creditors.
There should also be an introduction of appropriate levels of working capital in addition to the restructuring of the debt, and as the directors, you need to accept that real change is needed.
The importance of the CVA proposal
A Company Voluntary Arrangement proposal is an extensive document that is required by law to meet the guidelines of The Insolvency Act.
Each company voluntary arrangement proposal is drafted to address the specific circumstances of an individual company. Based on your circumstances, your insolvency practitioner will work with you to formulate an achievable repayment plan for your creditors.
This is worked out from your business’ projected profit and cashflow, any material asset disposals, seasonality or other trends, and discussions with your major creditors.
Once the proposal has been drafted, the directors need to feel it is possible to adhere to the terms, and you also need to obtain approval from 75% of creditors in order for the CVA to begin.
What is included in a CVA proposal?
Key information included in a CVA proposal includes how the company got to this stage, the value of assets, third-party properties, liabilities and the company’s financial position, a cashflow forecast, and the amounts the company will likely be able to repay each month.
Additionally, the proposal should also include the reasons why the creditors should agree to the CVA, the duration of the CVA, the Nominee’s expenses and the Supervisor’s duties, any guarantees that the directors will offer and how the funds are to be dealt with.
Finally, the creditors will want to see proof that the return will be better for them than liquidation.
How to ensure your proposal is approved
There are several steps to take to ensure your CVA proposal is approved. The ability to deliver a quality draft proposal can be a key deciding factor as to whether or not your creditors vote in favour of the agreement, so it’s essential that your draft proposal is well written, achievable and shows that the business is viable.
It’s also important to be realistic and don't offer to pay too much too soon – there should be no overdraft facilities. If the repayment plan is deemed unrealistic, your creditors will likely vote against the proposal, and once you enter into the CVA, if you default on payments, the company could be issued a winding up petition.
Here are some key things to consider:
- 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 are not appropriate, unless deemed to be windfalls.
- The use of a profits ratchet allows higher repayments if modestly forecasts profits are exceeded.
- Even if this approach leads to small repayment levels of 20-50%, your creditors will still prefer this to hopelessly optimistic forecasts.
How we can help
So, we hope that answers all of your “how do I get a CVA?” questions!
When putting together a CVA proposal, it’s important to work with an insolvency practitioner who has taken the time to understand your business and draft an appropriate proposal with suitable terms that ensure you meet your directors’ responsibilities.
At McAlister & Co, we are business turnaround specialists and can provide expert help and support to help you rescue your business. So, if you want to find out more about the CVA process or would like help drafting a CVA proposal, contact us today for FREE confidential advice.
