If your company is insolvent, a company voluntary arrangement (CVA) is a legal agreement that can help to reorganise your company’s debts.
It’s a formal insolvency process, which means you need to work with a licensed insolvency practitioner.
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 as long as over 75% in value vote in favour, the CVA is accepted.
So, how does the CVA process work? Read on to find out!
How the process works
The outline of events that lead up to a successful company voluntary arrangement are as follows:
1. Initial assessment
Following a formal decision by the company directors to enter into a CVA, a professional insolvency practitioner is appointed to set up the agreement.
To start the CVA process, the insolvency practitioner will then determine whether or not you are suitable for a CVA by reviewing the company, its people, markets and systems.
During this ''hiatus'' period, the company should not materially increase or decrease debts to any creditor, suppliers should be paid for supplies made and the activity of the company continues.
2. Drafting the CVA proposal
The insolvency practitioner will then draft a CVA proposal for the creditors to review which will include a detailed 3-5 years' worth of financial forecasts to help the creditors decide whether to support the deal or not. Discover more about what is included in the proposal here.
3. Consideration
Once the proposal has been drafted, the company directors will review the proposal and suggest any necessary revisions.
If they do not feel that the company will be able to adhere to the terms of the CVA and a realistic draft cannot be devised, the insolvency practitioner may recommend a creditors' voluntary liquidation instead.
Once the drafting has been completed and reviewed, the directors should then discuss the position with the company's secured creditors.
Meanwhile, a moratorium can also now be applied for to give the company breathing space by preventing suppliers and other creditors from taking any further action against the company whilst the proposal is negotiated.
4. The CVA is filed with the court
The final draft of the CVA will then be filed at the court and given a legal originating number. Signed copies will be sent to all creditors at least three weeks prior to the creditors’ meeting being held.
There is a minimum period of 14 days during which creditors can consider how they will vote. However, in practice, a longer period of time is often provided to allow HMRC and others the time they need to ensure the repayment levels will meet their needs.
5. Creditors’ and shareholders’ meetings
The insolvency practitioner will then convene a virtual meeting with all of the company’s unsecured creditors. During the meeting, the CVA will be proposed, and the creditors are given an opportunity to question the proposal, as well as request revisions or amendments.
Questions can also be asked of the directors, and a vote will then take place to decide whether or not the CVA will be accepted. Prior to the creditors meeting, the shareholders need to have approved the proposal too.
6. The vote
The creditors will then vote on whether or not to approve the proposal.
If the number of creditors responsible for 75% or more of the company’s unsecured debt vote in favour of the CVA, it will be approved, and if modifications to the proposal are requested then the same rule of 75% majority approval applies.
After this, another vote is taken without the inclusion of connected creditors. This vote requires at least 50% of votes to be in favour for the CVA proposal for it to be approved.
7. Report issued
If both meetings result in the approval of the CVA proposal, the insolvency practitioner will issue a report to all of the company’s creditors and the court, providing an overview of what happened during the meeting, who was present and how each party voted.
The report must be issued within four days of the meeting.
8. The CVA is approved
Once the CVA is approved, any legal actions being taken against the company are frozen and no further action can be taken unless the CVA is defaulted on.
With the CVA now in effect, the company will be expected to pay the agreed amount to a trust account for the duration of the CVA. As long as these contributions are met, the business will continue operating – however, if contributions are not met, the company will most likely be liquidated.
What next?
Once the CVA is approved, it’s time to get out there, make some money, and turn your business around! Remember, once a company is in a CVA, the directors must make it work and keep up any payments to creditors.
Two or more failures to pay the monthly contribution will deem the arrangement to be a failure and the company will be wound up.
So, if you are having any problems meeting the payments or there is a change in your circumstances, it’s important to let your insolvency practitioner know as soon as possible.
Can creditors challenge the CVA?
Sometimes, creditors may apply to court to challenge a CVA on the grounds of material irregularity or unfair prejudice. Challenges to CVAs are not particularly common, but any aggrieved creditors considering challenging a CVA need to do so within 28 days from the date of approval of the CVA.
A creditor can challenge a CVA under section 6 of the Insolvency Act 1986 on two grounds: unfair prejudice or material irregularity. Such challenges normally focus on voting at the creditors meeting.
To succeed on an unfair prejudice challenge, the challenging creditor will need to persuade the Court that the overall effect of the CVA is unfair and treats some creditors differently to others.
Conversely, to succeed on a material irregularity challenge, the challenging creditor will need to persuade the Court that the procedure for implementing a CVA was not correctly followed. If your CVA is challenged, your insolvency practitioner will be able to advise you on the next steps.
What happens when the CVA term ends?
At the end of the CVA agreement, your insolvency practitioner will provide a completion certificate and the company will be officially released from its obligations. Any remaining debts that were included in the agreement will then be written off.
How McAlister & Co can help
If you believe that a CVA is the correct course of action for your business, it’s important to work with an insolvency practitioner.
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, contact us today for FREE confidential advice.
