If business owners are looking to turn around their company and relieve pressure from creditors, Company Voluntary Arrangements (CVAs) are a tool that can assist them.
Company Voluntary Arrangements are legally binding deals which can offer a solution to an insolvent company by helping to improve cashflow and get businesses back on track quickly. An insolvency practitioner can help business owners to make the CVAs with creditors, creating a deal between creditor and an insolvent firm.
The 'deal' allows the business to arrange staggered payment of debt in pre-agreed chunks it can afford out of future profits.
The insolvency practitioner will provide the business owner with advice on how to get the company back on track and the CVA allows businesses to retain control whilst paying back the debt. Company voluntary arrangements can also help to avoid creditors taking legal action against the business, including winding up petitions.
In order for a business owner to propose a CVA, the company must first be insolvent. The owner should then call in an insolvency practitioner to advise on how to take the CVA forward.
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Once a CVA has been decided upon as the best course of action, business owners must ensure they follow certain steps in order to ensure that the CVA is successful.
Firstly, it is essential that the business must still be viable and able to return to profitability. Alongside debt restructuring, agreed levels of working capital must also be rolled out.
Secondly, the Company Voluntary Arrangement must be commercially viable and must not demand that the struggling business pays the creditors more than it can afford. The insolvency practitioner will advise on this.
Hard work and commitment is needed from the business in order to make the CVA work successfully and the board needs to accept that change is essential to making the most of the CVA.
What are the stages of a Company Voluntary Arrangement?
A company voluntary arrangement is completed in several stages. Firstly, the business owner must propose the CVA and call in an insolvency practitioner to advise them and put together the arrangement.
During this time period, business owners will be prevented from adding or reducing their debts to creditors.
A full review of the business, its staff, its operations and its market is often the second stage of the process. Within this review will be a three to five year forecast, designed to help creditors decide if they want to agree to the deal.
Thirdly, the business owners will ensure that the deal is achievable and that the company can afford to pay back the debt in the amount specified. The CVA will also be checked thoroughly to ensure it offers the best deal for the creditors. If this is not the case, the business could be closed, but an insolvency practitioner will be able to prevent this from happening in most cases.
Providing the banks see the firm as having the potential to return to profitability in the future, they will join negotiations about how and when their debt will be repaid.
The last stage of the process should see the firm's liquidity returning as its current assets are collected and injected into its cashflow. This cash is crucial as it will keep the company afloat until the company voluntary arrangement is filed in court. The filing is in order to attach a legal originating number to the CVA, which is then sent to all creditors, along with a printed version of the CVA itself.
What happens after creditors receive the Company Voluntary Arrangement?
Once the creditors have received the CVA, they will have a period of 14 days in which to consider the proposals before a meeting is arranged.
The insolvency practitioner will chair the meeting, which will often include representatives from the insolvency firm on behalf of the creditors, alongside the business owners. Creditors are encouraged to raise any queries they may have about the proposed CVA during this meeting.
If 75 per cent of the creditors vote in favour of the Company Voluntary Arrangement, it will go ahead, based on the value of the money owed to the creditors.
CVAs are accepted by creditors in the vast majority of cases, providing the proposals are sensible and viable. Creditors would rather receive partial repayment of between 30 and 50 per cent than risk the firm going under and getting nothing back. If creditors do wish to change the CVAs, more voting will need to take place.
Alongside the creditors meeting, the shareholders meeting is held. The latter will see attendees voting on whether to accept to proposals. A 50 per cent majority vote is required in order for the CVA to be accepted.
Following the conclusion of both the meetings, a report is compiled within four days by the chairman, confirming that the CVA will take place as outlined in the proposal.
From that point, the business is then obliged to maintain the agreed repayments of debt to the creditors. If they do not do so, the business could run the risk of falling into liquidation or receivership.
What happens after the Company Voluntary Arrangement period?
Upon the completion of the timeframe set out in the CVA , a completion certificate will be issued by the chairman. The business is then left to its owners to run and any outstanding debt from the original amount owed prior to the Company Voluntary Arrangement being agreed, is written off.
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