How a CVA can help
- All the affairs of the company are wound up
- The company’s assets are realised to go towards the claims of creditors
- Creditors are dealt with fairly
- Relieves pressure on the directors
A Company Voluntary Arrangement, or CVA, is a way in which a Licensed Insolvency Practitioner can help a Company to survive and avoid the need for a Liquidation. A Proposal is put forward by the Company to its creditors as to how they are going to be repaid. The creditors vote on that Proposal and if 75% by value of the creditors accept it then the Proposal is passed. All creditors are bound by its terms whether or not they voted for it.
The CVA procedure is extremely flexible. The insolvent Company, through its Directors, puts forward a Proposal to all of its creditors. In practice, the Licensed Insolvency Practitioner will draft the Proposal with information being provided by the Company’s Directors. Most CVA’s involve some form of restructuring of the Company’s business.
A CVA is appropriate for a Company that has a strong core business that is inherently profitable and where there are clearly identifiable reasons for the current insolvency. The Company needs to be able to provide a justification as to why it has got into difficulties and more importantly explain what it is going to do to get out of those difficulties. In such cases, the Company’s creditors are usually keen to support a Proposal which will ensure the survival of the business as this means that the Company can continue to purchase goods and services from its creditors.
CVA’s generally ring fence the Company’s existing debt up to the date of a creditors meeting. The Proposal will set out the way that this debt will be repaid either in whole or in part. The source of the funds to provide this repayment is varied. Usually the Company will make monthly contributions to the Licensed Insolvency Practitioner who will act as Supervisor of the Arrangement. In some instances a third party will inject funds into the Company to pay a one off dividend to the creditors. At Lines Henry we have used both types of funding to provide a dividend to the CVA creditors. In certain instances the third party has bought the Company for a nominal sum and paid monies into a fund for creditors. By doing this the third party acquire a business free of its existing creditors.
While every business is different, a typical Company Voluntary Arrangement might follow these steps.