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When should a company consider proposing a CVA?

  • The company must be insolvent which will normally mean that the company cannot pay its bills when they have fallen due for payment even if the company's assets may exceed its liabilities. This may for example mean the company is facing threats of being wound up or court proceedings are being taken against the company or bailiffs are threatened.  The company may be under threat of being removed from its trading premises by the company's Landlord.
  • The insolvency practitioner recommending the CVA must be satisfied that the company has a viable future and it is realistic to expect the company will be able to trade profitably and afford to repay to its creditors the amounts estimated in the CVA proposal. This is likely to mean that the company has arranged for professionally prepared financial forecasts to be prepared which provide the evidence needed by the insolvency practitioner to make a positive recommendation to the company's creditors.
  • The directors have considered other options for managing the insolvent position of the company and have concluded that it is in the interests of the company's creditors and the company's shareholders that a CVA should be proposed.

What are the benefits of a CVA?

The CVA sets up a mutually beneficial arrangement between the company and its creditors which is binding on all the company's unsecured creditors. Unsecured creditors includes not only the company's trade suppliers but also creditors with long term contracts with the company such as the company's landlords and employment contracts with the company's employees. The company's unsecured creditors can usually expect to be repaid more of their outstanding debts than would happen if the company was wound up. If the company continues to trade, the creditors who are also suppliers to the company may choose to continue supplying the company thereby preserving a source of business for themselves for the future.

The company's directors will typically remain in position as directors managing the company as well as preserving the jobs of some or all of the company's employees. The shareholders of the company will also remain in place.

The approval of a CVA provides the company with immediate relief from creditor pressure including pressure from HMRC, pending winding up petitions and other Court actions. Going forwards the company's previously unmanageable unsecured debts are managed by making a singly monthly repayment for a fixed period of time.

The CVA process requires a licensed insolvency practitioner to review the company's financial position and report to the company's creditors on the viability of the CVA proposal before the meeting which votes on the proposal. A licensed insolvency practitioner must also monitor and supervise the implementation of the CVA once it has been approved. This includes collecting the funds to be paid to creditors and distributing these funds at regular intervals.

For some companies the approval of a CVA can assist the business of the company by allowing the company to retain accreditations / memberships of professional or trade associations which are necessary for the company to provide its services.

What are the disadvantages of a CVA?

Creditors will expect as a condition of giving their support to a CVA by voting for the directors' proposals the CVA must promise to deliver to them a significantly better return than they could obtain by continuing enforcement action and winding up the company. This means that the terms on which the CVA is approved may require the directors to commit the company to making substantial monthly payments from the profits of the company into the CVA for several years. If the CVA fails because these payments become unaffordable the company will be wound up and the majority if not all the payments made into the CVA may be used in paying the costs of the CVA with nothing being repaid to the company's creditors.

Lenders and Suppliers may be reluctant to provide credit to the company once it has entered into a CVA and this may mean the company struggles to generate the cash flow it needs in order to be able to continue to trade.

CVAs are bespoke arrangements between the company and its creditors. In practice this can mean that it is sometimes difficult to obtain agreement between the company's directors concerning the terms on which a CVA proposal should be offered to creditors.

If the company is dependent for its future success on continuing to obtain supplies from suppliers who are existing creditors of the company this may mean these suppliers seek to be given preferential treatment in the CVA proposal. Other creditors of the company may vote against the proposal if they consider they are being unfairly treated.

A CVA may not be an attractive option for the company's directors and shareholders. The directors and shareholders of the company will consider the options for the company and how these will impact on themselves. In many cases the directors may conclude they are not prepared to take on the risks and costs associated with a CVA when other company restructuring options may provide them with better outcomes.

How does an Insolvency Practitioner help a CVA?

Because a CVA is a formal insolvency process an Insolvency Practitioner must be appointed to review the CVA proposal and report to the company's creditors concerning the viability of the proposal. An Insolvency Practitioner will usually be instructed by the company's directors to review the company's financial position and advise the directors on the options available to the company.

The Insolvency Practitioner will provide the company's directors with an independent view of the company's financial position and assist the company in deciding whether a CVA is a viable option. This will include providing guidance on the terms on which a CVA is likely to be approved by the company's creditors.

The Insolvency Practitioner will have the knowledge and experience of how CVAs operate in practice. This means that the Insolvency Practitioner may (with the consent of the company's directors) assist the company by negotiating some of the terms of a CVA with the company's creditors.

It is usual for the Insolvency Practitioner and his team to assist the company's directors with formulating and drafting the CVA proposal. Insolvency Practitioners are familiar with CVA proposals which are technical documents and must contain information which is required by law as well as information in line with regulatory guidance.

Although the CVA will provide for the company's directors to continue managing the day to day operations of the company the Insolvency Practitioner will act as the Supervisor of the CVA. Creditors will have the comfort of knowing that an independent Insolvency Practitioner is monitoring the company to make sure it complies with its obligations under the terms of the CVA and will act quickly should the company fail to make payments when due or otherwise default on the terms of the CVA.

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