Company Voluntary Arrangement (CVA)

Company Voluntary Arrangement (CVA)

Can the business survive if its debts are restructured?

 

A company can experience serious financial difficulty even when the underlying business still has value.

The company may have regular customers, capable employees and a healthy order book, but historic tax arrears, unpaid suppliers, borrowing or the failure of a major customer may have left it unable to meet its debts as they fall due.

In those circumstances, closing the company may not be the only option.

A Company Voluntary Arrangement, commonly known as a CVA, allows a company to reach a formal agreement with its creditors. The arrangement may give the company additional time to pay its debts or allow it to repay an agreed proportion of what it owes while continuing to trade.

The directors usually remain in control of the business during the arrangement. Employees can remain with the company, customer relationships can be preserved and the business has an opportunity to recover.

However, a CVA is not simply a convenient way to reduce debt. It is a formal insolvency procedure that requires careful preparation, creditor approval and continued financial discipline.

A company that cannot trade profitably will not be rescued simply because its historic debts have been reduced. In that situation, a CVA may only postpone liquidation while the company creates further liabilities.

The important question is therefore not whether creditors might accept less than they are owed. It is whether the business can generate enough cash to meet its future costs once the historic debt has been restructured.

This guide explains when a CVA may work, how the process operates, what creditors will consider and what the arrangement means for the company and its directors.

This guide relates primarily to companies incorporated in England and Wales and provides general information rather than advice on any particular company or director.

What is a Company Voluntary Arrangement?

A CVA is a legally binding arrangement between a company and its creditors.

It is governed principally by Part I of the Insolvency Act 1986. The proposal may provide for the payment of all or part of the company debts over an agreed period. It may be funded through future trading profits, investment, refinancing, asset sales or a combination of these sources.

The arrangement is designed around the circumstances of the company. There is no standard repayment period or fixed percentage that every business must offer.

Some arrangements involve regular monthly contributions over several years. Others depend on a lump sum, the sale of an asset or additional payments when profits exceed forecast.

A licensed insolvency practitioner assists with the formal process. Before approval, the practitioner normally acts as nominee. If the proposal is approved, the practitioner usually becomes the supervisor and oversees the arrangement.

A CVA is primarily a restructuring tool for unsecured debts. Secured and preferential creditors receive particular legal protections and their rights cannot generally be altered without their consent. Once properly approved, the arrangement can bind unsecured creditors who were entitled to participate, including creditors who voted against it.

When can a CVA work?

A CVA is most likely to succeed where the company has a viable core business but is being held back by historic debt.

The company may be generating sufficient income to pay its current wages, suppliers, rent and taxes, but it may be unable to clear liabilities created during an earlier period of difficulty. Restructuring those older debts may provide the breathing space needed for the company to recover.

There must be a clear reason for the financial problems and a credible explanation of what has changed.

The failure of a major customer, an unexpected tax liability, a disputed contract or an unsuccessful expansion may have caused the insolvency. A CVA may be appropriate if that problem has been contained and the remaining business can trade successfully.

Operational changes may also make recovery possible. The company may need to close an unprofitable part of the business, reduce its premises, improve pricing, change suppliers or restructure its workforce.

The directors must be prepared to make those changes. A CVA cannot succeed where management continues to operate the company in exactly the same way that created the original difficulties.

Creditors will also compare the proposed arrangement with the likely outcome in administration or liquidation. A proposal becomes more persuasive where creditors are expected to receive a better return from continued trading than from the immediate closure of the company.

When is a CVA unlikely to succeed?

A CVA cannot repair a business that has no realistic route to profitability.

If normal trading continues to create losses, reducing the historic debt will not solve the underlying problem. The company will still need to pay new suppliers, wages, rent, tax and other operating costs while also making contributions under the arrangement.

A proposal is also vulnerable where its forecasts depend on everything going perfectly. Sales may arrive later than expected, customers may pay slowly, costs may rise and essential equipment may need replacing.

A sustainable plan should be able to absorb ordinary commercial setbacks. A company that will default as soon as one customer pays late does not have enough working capital to support a formal arrangement.

The loss of supplier credit can create another difficulty. A supplier whose old debt is included in the CVA may decide that future orders must be paid for in advance. This can increase the amount of cash required to operate the business.

Directors should therefore consider how suppliers, landlords, lenders, customers and regulators are likely to react. The company must be able to survive under the terms that will actually be available after approval, rather than the terms it enjoyed before it stopped paying its debts.

Creditor confidence is equally important. A proposal may struggle where financial information is incomplete, previous promises have been broken or significant transactions cannot be explained.

A CVA requires creditors to accept risk. They are more likely to do so when the company is transparent about what went wrong and realistic about what can be achieved.

Preparing the proposal

The directors normally begin by reviewing the company position with a licensed insolvency practitioner.

Reliable financial information is essential. The practitioner will need to understand the value of the company assets, the amount owed to each creditor, the position of secured lenders, current tax liabilities and the company expected future performance.

The proposal should explain why the company became insolvent, what changes have already been made and how the arrangement will be funded.

It should also contain a comparison with the return creditors might receive through another insolvency procedure. This allows creditors to make an informed commercial decision.

Cash flow forecasts deserve particular attention. They should include future tax liabilities, wages, rent, supplier payments, finance costs and the proposed CVA contributions.

They should also allow for seasonal fluctuations, delayed customer payments and other predictable pressures.

The figures must reflect the company true position. A proposal prepared from outdated accounts, estimated creditor balances and ambitious sales targets may look encouraging, but it will provide a weak foundation for recovery.

The nominee considers the proposal and reports through the statutory process. The document is then circulated so that creditors and shareholders can consider it.

Although the insolvency practitioner helps to prepare the proposal, it remains the company proposal. Directors should understand the assumptions and commitments being presented in their name.

How do creditors approve a CVA?

Creditors are invited to vote on the proposal.

At least 75 per cent by value of the creditors who vote must support it. There is also protection for creditors who are not connected with the company. The decision cannot be carried through connected votes where the required support from unconnected creditors is absent.

Creditors may accept the proposal, reject it or seek modifications before agreeing to it.

Those modifications may change the level of contributions, the length of the arrangement, reporting requirements, the treatment of asset sales or the consequences of default.

The directors must decide whether any proposed changes remain affordable and commercially acceptable.

Approval should not be treated as a formality. A large creditor such as HMRC, a landlord or a major supplier may have enough voting power to determine the outcome.

HMRC will normally consider the company compliance history, the cause of the arrears, the reliability of its forecasts and its ability to pay future taxes. It will also consider how the proposal compares with the likely result in liquidation.

Once approved, the CVA is legally binding on creditors entitled to participate in the process, subject to the terms of the proposal and the relevant statutory rules.

Does proposing a CVA stop creditor action?

The preparation of a CVA does not automatically prevent creditors from taking action against the company.

This can be important where the company faces a winding up petition, enforcement by a secured lender, action by a landlord or the loss of essential assets.

A separate statutory moratorium may sometimes provide temporary protection while rescue options are considered. During a moratorium, the directors remain in control while an insolvency practitioner acts as monitor. The company must continue paying specified liabilities and the monitor must remain satisfied that rescue remains likely.

Administration may be more appropriate where stronger and more immediate protection is required.

The existence of a possible CVA should therefore not create false reassurance. Directors need to understand what creditor action can still be taken while the proposal is being developed.

What happens after approval?

The directors usually remain in control of the company.

They continue managing employees, dealing with customers, operating the bank account and making normal commercial decisions. This is one of the main differences between a CVA and administration or liquidation.

Continued control also means continued responsibility.

The directors must ensure that the company complies with the arrangement and pays new liabilities as they arise. This includes wages, ongoing supplier costs, rent, PAYE, National Insurance and VAT.

Paying the CVA contribution while allowing new tax or supplier arrears to build up is not a successful rescue. It simply replaces one insolvency problem with another.

The supervisor monitors compliance with the approved proposal. The supervisor may collect contributions, agree creditor claims, distribute funds and report to creditors. The supervisor will also deal with breaches, variations and the eventual completion or termination of the arrangement.

The supervisor does not normally manage the company and does not become the personal adviser of its directors. The directors remain responsible for day to day trading and for responding promptly when performance falls behind forecast.

Trading during the arrangement

Life after approval may not feel entirely normal.

Suppliers may reduce credit limits or require payment in advance. Lenders and finance providers may review their facilities. Customers may ask for reassurance about continuity of supply, warranties or completion of existing work.

The company may also need to provide regular financial information to the supervisor. This can include management accounts, cash flow updates, bank statements and evidence that current taxes are being paid.

These requirements can feel demanding, but they often introduce the financial discipline that was previously missing.

Directors should monitor results against forecast throughout the arrangement. Problems are easier to manage when identified early.

Waiting until several payments have been missed usually limits the available options and weakens creditor confidence.

Employees normally remain employed by the same company. However, the restructuring may still require redundancies, changes to working arrangements or the closure of a site or department. Employment law obligations continue to apply and specialist advice may be required.

Businesses operating under licences, regulatory approvals or important contracts should also consider whether a CVA creates notification obligations or affects their ability to continue trading.

What does a CVA mean for the director personally?

A CVA restructures the debts of the company. It does not automatically resolve the personal liabilities of its directors.

Personal guarantees are a common example.

A bank, landlord, finance provider or supplier may still pursue a director under a valid guarantee even when the company debt is included in the arrangement. Approval of the CVA does not normally release the guarantor unless the creditor expressly agrees.

The wording of each guarantee should be reviewed carefully. Directors need to understand the amount covered, any security over personal assets and how payments received from the company may affect the remaining personal liability.

Director loan accounts also require attention. If a director owes money to the company, that balance remains an asset of the business. The proposal should explain how it will be treated.

Creditors may expect repayment, particularly where they are being asked to accept only part of what they are owed.

Director remuneration, dividends and payments to connected businesses may also be examined. Directors can continue receiving reasonable payment for the work they perform, but the amount should be commercially justifiable.

A proposal that requires creditors to accept substantial losses while directors continue taking excessive benefits is unlikely to receive a warm response.

Directors duties continue throughout the process. Financial decisions should be properly recorded, company assets must be protected and the interests of creditors must remain central while insolvency continues.

Approval of a CVA does not provide retrospective protection for earlier conduct. If the arrangement later fails and the company enters liquidation or administration, previous transactions and director conduct may still be reviewed.

The advantages of a CVA

The principal advantage is that the company can continue trading.

The existing business, workforce, customer relationships and trading history may be preserved. The directors normally retain control and do not have to transfer the business into a new company.

Historic unsecured debt can be brought within an affordable structure. This may improve cash flow and give the company time to implement operational changes.

Creditors may also receive more than they would through immediate liquidation. Future trading profits can sometimes produce a return that would not be available from the sale of the company existing assets.

A CVA is also flexible. Contributions can be designed around the expected performance of the business and may be supported by investment, refinancing or asset sales.

However, that flexibility must be used carefully. A complicated proposal may be difficult to understand, operate and supervise.

The disadvantages and risks

A CVA requires creditor support and approval is never guaranteed.

The company may incur professional costs and spend considerable management time preparing a proposal that creditors ultimately reject.

Approval does not guarantee success. The business must continue meeting its normal expenses and the agreed contributions, often while dealing with reduced supplier credit and increased scrutiny.

The arrangement is also a matter of public record. Customers, suppliers, lenders and credit agencies may become aware of it.

Secured creditors usually retain their rights unless they agree otherwise. A CVA may therefore leave a secured lender with significant influence over the future of the company.

The greatest risk is failure.

If the company misses contributions or creates new arrears, the supervisor may be required to terminate the arrangement. This can lead to administration, liquidation or further creditor action.

By that point, the company may have used additional working capital and the directors may have invested more personal money.

A CVA should therefore be proposed because the evidence supports recovery, not because the directors wish to postpone a difficult decision.

What happens if the company falls behind?

A temporary problem does not always mean that the CVA must end.

The proposal may allow a short payment break, a period to remedy missed contributions or a formal variation of the arrangement.

A variation normally requires creditors to consider the revised position. They will want to know why the original forecast was missed, what has changed and why the amended proposal is more likely to succeed.

Further investment, refinancing, an asset sale or additional restructuring may provide a solution.

Where the business is no longer viable, administration or liquidation may need to be considered.

The directors should speak to the supervisor as soon as difficulties appear. Early communication preserves options. Delayed disclosure tends to remove them.

CVA, administration or liquidation

A CVA is usually most suitable where the underlying business remains viable, the directors are capable of continuing to manage it and creditors are willing to support a restructuring.

Administration may be more appropriate where the company needs immediate protection from creditor action, where control must pass to an independent office holder or where a sale of the business is being considered.

Liquidation is generally appropriate where there is no realistic prospect of rescuing the company and continued trading would risk increasing creditor losses.

Informal negotiations, refinancing, investment or an HMRC Time to Pay arrangement may sometimes provide a solution without a formal insolvency procedure.

The procedure should follow the commercial circumstances of the company. A CVA should not be selected simply because it appears less severe than administration or liquidation.

Why directors may need independent support

The nominee and supervisor have important statutory and professional responsibilities, but they do not act solely for the personal interests of the director.

Their role is to assess, establish and supervise the arrangement in accordance with its terms and the law.

Directors may need separate support to understand personal guarantees, loan accounts, earlier transactions, personal funding and the consequences of failure.

They may also need help comparing the company options before committing to a proposal.

The distinction is important. The insolvency practitioner deals with the formal arrangement. Independent director support helps the director understand the decision, the risks and the effect on their personal position.

How Navigate Business Recovery supports directors

Navigate Business Recovery helps directors determine whether a CVA offers a genuine route to recovery or merely delays an unavoidable insolvency process.

The starting point is the underlying business rather than the procedure.

We review the company trading position, cash flow, creditor pressure and working capital requirements. We consider whether historic debt is the main problem or whether the business remains commercially unviable.

We also help directors compare a CVA with informal negotiations, refinancing, Business Rescue, Administrations and Liquidation.

Where a CVA appears realistic, we help the director prepare for the formal process. This can include organising financial information, testing forecasts, identifying personal guarantees and examining the treatment of director loan accounts.

We do not replace the nominee, supervisor, accountant or legal adviser. Our role is to help the director understand the wider picture and approach the process with reliable information and realistic expectations.

Throughout the arrangement, directors may also need support when trading falls behind plan, creditors raise concerns or a variation is being considered.

Early decisions are usually better decisions. The purpose of independent support is to ensure that the director understands both the opportunity presented by the CVA and the consequences if the plan cannot be maintained.

Summary

A Company Voluntary Arrangement can allow an insolvent company to restructure its unsecured debts while continuing to trade.

It is most likely to succeed where the core business is viable, historic debt is the main cause of the pressure and the company has enough working capital to meet future liabilities.

Creditors must approve the proposal and will compare their expected return with the outcome available through administration or liquidation.

The directors normally remain in control, but they also remain responsible for managing the company, paying new liabilities and complying with the arrangement.

Personal guarantees, director loan accounts and earlier transactions are not automatically resolved by the CVA and may require separate advice.

A CVA can be an effective rescue tool, but it should only be proposed when realistic forecasts and reliable financial information show that the business can survive.

 

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