Creditors Voluntary Arrangement Analysed

If your company owes a substantial debt, one option to help save it could be entering into a creditors voluntary arrangement (CVA). Through this business rescue strategy, a CVA can repay part of what is owed to trade creditors.

CVAs have drawbacks; in this article, we’ll summarise them.

person holding documents while in a meeting

Costs

Creditors’ voluntary arrangements often cost much less than liquidation or administration due to allowing companies to continue trading while simultaneously reducing debt levels; directors maintain control, and the process is significantly faster than going down that route.

CVAs protect from legal action by binding creditors to the terms of their proposal, making legal actions against your company no longer viable. But there may still be risks for directors if their CVA fails – for instance, it might not be approved by creditors, which could result in liquidation proceedings against your business. Therefore, directors must carefully assess all available options and select what would best fit their company’s business objectives.

CVA processes involve several steps and typically require the assistance of professionals with expertise in this area. This may include collecting financial information, reaching out to creditors, and creating the CVA proposal document; in some cases, it also includes convening creditors’ meetings so they can vote on this proposal document; furthermore, the entire process can take up a lot of time and energy – it should not be underestimated!

BeforeBefore finalising a CVA agreement, it is wise to approach key creditors to gauge their reaction and ensure it will meet the needs of your business and be implemented smoothly – as well as increase chances of acceptance among creditors.

Timescales

Managing an enterprise that has fallen into debt may require taking steps such as initiating a Company Voluntary Arrangement (CVA). A CVA allows directors who remain in control to stop creditor pressure while turning around their business. However, you must understand all associated timelines before embarking on this path.

CVAs are known as formal arrangements between an insolvent company and its creditors that allow it to continue trading while paying back debts over 3 to 5 years. A CVA offers more flexibility than liquidation, which may lead to losing key employees and cash flow issues.

To establish a Company Voluntary Arrangement, its directors must present it to its creditors and obtain majority vote approval. A virtual meeting of creditors will often be convened to consider proposed CVAs; once approved, your company will be protected from legal actions from creditors, and all the terms of your CVA will become legally binding on them all.

CVAs may also help protect directors from personal liability. Even when acting responsibly and keeping creditors’ best interests at heart, directors may still find themselves personally liable for company debts. It can reduce this risk by showing how your company actively tries to maximise those of its creditors.

Reputation

Insolvency procedures such as company administration (including pre-pack administration ) and liquidation have long been considered viable rescue options for businesses still trading insolvency. But for these still trading businesses that still face debtor pressure a CVA may provide relief and allow directors to restructure the company to become profitable again. Begbies Traynor is an expert at helping businesses understand whether CVAs may suit them as a rescue option and guide them through this process.

CVA processes can be very intricate and should be managed carefully to ensure their success. For instance, it’s vital that friends or family of directors who have provided loans to the business are excluded from any discussion during this phase. Furthermore, major key creditors that could potentially block or push through changes must also be carefully taken into account when creating proposals for CVAs.

Directors will work with an insolvency practitioner to draft a Company Voluntary Arrangement proposal which can then be presented to creditors for consideration. This must be done legally as it must contain all details required by The Insolvency Act 1986 and The Insolvency (England and Wales) Rules 2016. Seeking expert advice early from an insolvency practitioner will ensure your proposal is realistic and likely to succeed.

Creditors

A well-constructed CVA can increase cash flow while decreasing debt burden and allow directors to continue running the business while resolving historical debts. In addition, this approach may prove superior to liquidation or administration, which can damage a company’s reputation while decreasing consumer trust, leading to employee termination and the sale of assets.

CVAs are agreements between companies and their creditors to repay a percentage of what’s owed over an agreed-upon period, typically set by 75% of voting creditors. While creditors may attempt to negotiate over terms and conditions, remember they’re positively just trying to recover what’s due, so make certain the proposal is realistic and achievable.

Once a CVA has got the green light to go through, it creates a protective moratorium’ around the business, stopping creditors from filing legal actions or demanding payments. Instead, during this time, the company must contribute to the Supervisor’s trust account as agreed; otherwise, failing, it will fail the arrangement and go into liquidation.

Furthermore, creditors must send annual statements and arrears notices in a certain format; once concluded. However, this should stop, and any pressure can be managed through keeping in touch with creditors explaining why you opted for CVA as described.