How can a company voluntary arrangement (CVA) help a business in financial difficulty? Keith Steven, managing director at KSA Group Ltd, explains.

What is a CVA?

A CVA is a formal deal between an insolvent business and its creditors (lenders), usually over 3 to 5 years. The arrangement is enshrined in law in Part 1 of the Insolvency Act 1986. However, unlike administration or liquidation, details of a company going into a CVA are not publicly announced in The Gazette, but can be found at Companies House. 

The CVA mechanism is there to help companies in financial distress that are perhaps behind with tax payments, have cashflow problems, or are facing legal action. To help ease the pressure, a debt repayment plan can be put in place to ensure that creditors receive something back over the years. Often, when a company is in administration or liquidation, creditors see very little recovery of their debt.

With a CVA, debt can be paid off from future profits over a set timeframe, and the business can continue to trade. A proportion of debt may also be written off.  A CVA allows a company to restructure and re-evaluate the business, and to create better structures and business strategy. Also, directors can stay in control of the company.

Avoiding publicity is almost always beneficial to companies, as they can keep their reputation intact without causing unnecessary worry to creditors. It is recommended, however, that creditors and trade suppliers are informed prior to entering a CVA, to ensure a trusting relationship and continued work.

Advantages of a CVA

• stops winding up petitions and other legal actions
• stops pressure from VAT, PAYE and tax payments
• terminates lease liabilities
• terminates employment and supply contracts (at no cost)
• no administrators are brought in; directors continue to run the company
• lower costs than administration
• creditors see a better return
• is not publicly advertised

Disadvantages of a CVA

• the company has no credit rating, so it may be difficult to continue with current suppliers and lenders
• the company must make monthly payments for a number of years without fail, so has  to stick with it and stay determined.
• CVA proposals can’t be put together quickly, so if there are serious legal actions, administration may be necessary to protect the company before the CVA is approved
•  75% of creditors (by value) who vote must agree to the CVA
• the CVA only binds unsecured creditors, so secured creditors still have the power to appoint an administrator or withdraw funding

The CVA process

Here’s brief step-by-step guide to the CVA process:

1. A turnaround practitioner or insolvency practitioner is appointed, alongside advisors, to work with the director to prepare a CVA proposal. This proposal must be fit, fair and feasible, and should include detailed financial forecasts. Over this time, the company can continue to run as normal.
2. The proposal draft should be discussed with secured creditors and show how the CVA will maximise the creditors’ interests. All parties should agree on how debt is to be repaid.
3. The proposal is then filed at court, where it is printed and sent out to all creditors.
4. The creditors then have a minimum of 17 days to consider the CVA before a meeting is held.
5. At the meeting, creditors take a vote (which can also be done by proxy). 75% of creditors or over (by value) of those who vote at the meeting must vote in favour  of the CVA for it to be approved.
6. The CVA supervisor is in charge of collecting payments each month to distribute to creditors, usually annually.

A CVA is a rescue solution and could be the right choice for a business in financial hardship. With some determination, hard work, and a little help from expert CVA advisors, a company can be turned around and brought back to profit.

About the author

Keith Steven of KSA Group Ltd has been rescuing and turning around companies since 1994. He has worked for insolvency firms, turnaround funds and venture capital investors and is the author of the website www.companyrescue.co.uk. You can follow Keith on Google+, and Company Rescue on Twitter @KSAgroup.