Understanding a CVA – what you need to know
In instances where a limited company is insolvent, the use of a Company Voluntary Arrangement can help to ensure that creditors and debts are paid.
Should the agreement with creditors to delay or compromise the payment of such debts be made, then the company can continue trading.
A CVA can be tailored to meet the need of the business concerned, as it enables a very flexible approach to be taken.
As part of a proposal, any existing contracts with creditors will be replaced with a set of new terms designed to get the best results.
For instance, an agreement to pay an invoice within a set period of time might be replaced with an agreement which states that payments will be made subject to certain conditions.
This could see a company pay a fixed monthly sum for a period of time that means creditors will receive a minimum dividend of p in the £.
Gaining the support of creditors
Most CVA agreements are supported by creditors if it is possible to show that better outcomes can be achieved than if other insolvency methods are used.
Should a company be liquidated and its assets sold, the creditor may not receive as much as they would if a company voluntary arrangement was agreed, for example.
When appointed, an insolvency practitioner has one month to set out an arrangement which covers the levels of debt that can be paid and an appropriate payment schedule.
Creditors will then receive a written notice of the arrangement and will be invited to meet, discuss and vote on it.
Making people aware of the process
In order to gain a CVA, creditors who are owed at least 75% of the debt must agree to it – insolvency practitioners will often look to obtain the support of the creditors in advance to make the process more straight forward.
This can be done by outlining the stages of the process and by ensuring that they are aware of the current state of business affairs.
Some practitioners will also help companies to find new sources of funding to enable them to improve their situation once a CVA is agreed.
Smaller firms can gain some protection to propose and implement a CVA without the threat of proceedings from creditors with the use of a moratorium.
Larger companies meanwhile will often need to use administrative procedures to ensure they have protection.
Should an agreed payment schedule not be met, any one of the creditors could apply to wind up the business.
By Phil Smith