A Company Voluntary Arrangement (CVA) is a formal insolvency procedure operated under the provisions of the Insolvency Act 1986 and the Insolvency Rules. The purpose of a CVA is to set up new agreements between the company and its creditors with the aim of providing a better return to the company’s creditors than if the company had to cease trading and be wound up.
A CVA creates a contract between the company and its creditors which alters the previous terms of payments to the company’s creditors.
For a company struggling to pay its creditors but nevertheless with an underlying profitable business a CVA can be an attractive option. A CVA can provide the company with the opportunity to continue trading and rather than simply going into liquidation the company’s future profits can be used to repay something back to the company’s creditors. This can provide the creditors with a better return than would have occurred if the company went into liquidation.
A CVA proposal is prepared and sent to all the company’s creditors. The proposal will typically explain the reasons why the company is in financial difficulties. The proposal will also explain how the directors propose that the company will continue its operations and generate sufficient revenue to cover the company’s operating costs and also pay something back to the company’s creditors. Provided that 75% in value of the creditors voting on the proposal vote in favour the proposal will be accepted and all the company’s unsecured creditors will be bound by its terms even if they have not voted or have vote against the proposal.
The CVA must be proposed with the support of a licensed insolvency practitioner who will report impartially on the viability of the proposal to the company’s creditors. If the proposal is approved an insolvency practitioner will be appointed to supervise and monitor the implementation of the terms of the CVA. The Supervisor will collect monies due to the company’s creditors and distribute these to the creditors after paying the costs of the CVA.
Once the CVA is approved all legal actions against the company are stayed or frozen and this even includes pending winding up petitions. The company’s creditors cannot take any further action against the company unless the CVA fails. (This does not apply to creditors who lend money to the company after the CVA has been approved.)