If your company is facing financial difficulties then it may be able to avoid the risk of statutory demands, winding up petitions and other creditor action through a creditors voluntary arrangement (CVA).
A CVA is a formal agreement between your company and its creditors, usually over 3 to 5 years. Often debts can be reduced or repaid over this period.
What Is A CVA?
A CVA is a debt restructuring tool used by insolvency practitioners to help you pay off your creditors over a period of time. It involves a company or limited liability partnership filing for bankruptcy, then working with a practitioner to come up with an “arrangement” that outlines the amount of money you can afford to pay and a payment schedule.
The most important part of a CVA is figuring out what went wrong so you can get it fixed. This requires an examination and a good dose of detective work. It is also important to understand how you will be treated once you’re back on your feet. Aside from practical support, it’s essential to get the right treatment for underlying medical issues that may be causing your CVA in the first place.
How Does It Work?
CVAs are designed to allow a business to pay off debt from future profits over a specified time frame, whilst continuing to trade. Depending on the nature of the proposal, these contributions may be made by reducing monthly outgoings or by making lump-sum payments (such as on receipt of an insurance claim or completion of a large contract).
A licensed Insolvency Practitioner (“IP”) will draft a proposal for creditors to vote on. This proposal is based on current and future cash flow projections to determine the level of payments that can be made by the company.
What Happens If It Doesn’t Work?
CVAs are a popular solution for reorganising debts in UK companies. They can help to put cash flow problems behind a business and give directors breathing space to rescue it.
However, they are not without their drawbacks. The CVA process can be long and can leave the company open to administrators being called in, even if the company has complied with its agreement.
Similarly, the CVA can be challenged by creditors who feel they have been unfairly prejudiced. This could result in the proposal being rejected by the creditors.
What Happens If It Isn’t Approved?
If you have successfully entered into a CVA and it is rejected by creditors, then there are three alternatives that are normally available to you.
The first is administration – your company will have a period of eight weeks in which to formulate a rescue plan or sell off business assets for the benefit of creditors. Any active creditor litigation is ceased during this time, and an insolvency practitioner is appointed to take over control of the business.