What is a Company Voluntary Arrangement?

A Company Voluntary Arrangement (“CVA”) is a contract between a company and its creditors which agrees how the company’s debts will be resolved. The company will prepare, with the assistance of an Insolvency Practitioner, a proposal to its creditors as an offer of full and final settlement. Whilst the contents of the proposal are not prescriptive, normally it will include monthly contributions from surplus trading income, and the realisation of any assets not required by the company to undertake it ongoing operations.

The exact proposal made will usually be discussed and agreed with an Insolvency Practitioner, who will work with the company to ensure that the proposal is fair, and complies with legislative and best practice guidance. At this stage the Insolvency Practitioner will assume the role of Nominee.

The proposal will thereafter be circulated to the company’s creditors, who will vote on the proposal. The proposal requires the approval of 75% of the company’s creditors by value if it is to become legally binding. Where the company has connected creditors, such as a holding company, or associates or family members of the directors, a second round of voting will be held where connected creditors are not entitled to vote, although at this stage only a majority in excess of 50% by value of the company’s unconnected creditors is required.

If approved, the CVA will commence and the company will be obliged to follow the terms proposed. The company’s creditors will be bound by the terms of the CVA and will receive dividend payments from asset realisations. The Insolvency Practitioner will cease acting as Nominee and will become the Supervisor of the CVA, and work to ensure that both the company and the creditors act in accordance with terms of the CVA proposal and in accordance with the provisions of the Insolvency Act 1986 and the Insolvency (England & Wales) Rules 2016.

What does a CVA mean?

CVA is the commonly used abbreviation of “Company Voluntary Arrangement”.

What happens to shareholders in a CVA?

Whilst a Company has a duty to make its shareholders aware of their proposal for a CVA, ultimately it is approved by the company’s creditors. If approved, it is binding on the Company.

This is because when a company is insolvent, the directors’ duties of care are due firstly to its creditors, as opposed to its shareholders – who are it is ultimately accountable to whilst undertaking normal solvent trading.

It is highly likely that shareholders will not receive dividends throughout a CVA, nor will they be able to reject a CVA. Shareholders may wish to consider exercising other rights, such as Liquidation of Administration proceedings, but as the purpose of a CVA is to preserve a company and allow it to continue trading, it may be difficult for such a challenge to succeed.

This is in part because if the CVA is successfully implemented, the Company should resolve its creditor position, and in due course will therefore be placed to resume dividend payments to shareholders.

Who is Eligible for a CVA?

Any company which is insolvent, or contingently insolvent, may propose a CVA. However, the Insolvency Practitioner acting as Nominee will need to be satisfied that the Company is a viable going concern and that the CVA procedure will enable the company to continue to trade successfully and return to solvency upon its completion by virtue of the settlement of the liabilities which are bound by the CVA.

What is the purpose of a CVA?

The purpose of a CVA is to propose an offer to creditors that will settle the company’s liabilities. Usually the CVA will result in a better return to creditors than will be available in an alternative insolvency procedure. The company will be able to continue to trade during the CVA and upon the successful completion of the CVA will return to solvency, having resolved its liabilities, as opposed to ceasing activities in a liquidation scenario.

When Can a CVA Be Proposed?

A CVA can be proposed when a company is insolvent, but has a core going concern business that can be rescued through the CVA process. Usually a CVA is proposed by the company’s directors, but an Administrator or a Liquidator could propose a CVA if they considered it to be appropriate. It is not unusual for companies to enter into Administration and subsequently propose a CVA.

Benefits of a Company Voluntary Arrangement

The company is immediately relieved of its historic liabilities, although it will likely be required to pay ongoing debts as and when they fall due. This can ease pressures on working capital and enable the officers of the company to focus on the company’s day to day and future trade and on restructuring the company’s operations going forward.

Risks of Company Voluntary Arrangement

As a CVA is a formal insolvency process, it is the responsibility of the Supervisor to ensure that the company complies with the terms of its proposal. If the company fails to meet its obligations the Supervisor will be obliged to take steps, as outlined in the proposal, to rectify the situation. This can include failing the CVA, and therefore ending the protection the company has under its terms. Creditors will usually insist that the CVA contains a provision for the company to be placed into compulsory liquidation by the Supervisor where the company has failed to meet its commitments.

How long does a company voluntary arrangement last?

There is no prescribed length for a company CVA and the length of the CVA will usually depend on the circumstances of the company and the level and nature of payments it is proposing to make. Where a CVA is based upon contributions from monthly turnover, it will usually run for a period of several years, although not usually longer than three years.

What does a CVA mean for shareholders?

During the period of the CVA it is likely that creditors will not authorise dividend distributions to be declared as any surplus funds should either be retained by the company as working capital or distributed to creditors in reduction of their debt.

However, should the company successfully complete the CVA the company will have returned to solvency and the shareholders will be able to receive distributions going forward. Shareholders may also wish to consider that in a liquidation or company administration scenario the prospect of future dividends is completely extinguished. Read our guide on Administration vs Liquidation.

How Does a CVA Affect Employees?

Employees are able to lodge a claim as creditors in the CVA for any monies due to them as at the date the company entered the CVA which will not be met on an ongoing basis in line with their usual contract terms.

However, employees should note that any arrears of wages or holiday pay that accrue after the CVA commences will not be met the Redundancy Payments Service should the CVA fail and the company enter into liquidation.

Does a CVA Affect all Creditors?

All creditors, other than those with the benefit of formal security, e.g mortgages, chattel mortgages or debenture, are bound by the terms of the CVA. However, the proposal may contain provisions for certain creditors to be treated in a different way to other creditors – for example an essential wholesaler may continue to be paid on time and in full in order to secure supply. Alternatively, the company’s landlords may collectively agree a reduced rate of ongoing lease payments to enable the company to continue to trade from premises it may otherwise seek to abandon.

It is important that such terms are discussed and preferably agreed with the creditors concerned as court challenges have from time to time been issued by creditors who consider that a CVA has been used to compel them to accept unfavourable terms as against the company’s other creditors.

What happens after a company voluntary arrangement?

Assuming the CVA has completed successfully and creditors have received an agreed dividend, the liabilities bound within the CVA are deemed to have been settled in full and the company will be free to trade and operate without the restrictions which the CVA placed upon it.

What percentage of CVAs are successful?

As CVAs usually run over a period of time, and can fail at various stages throughout the process, it is difficult to provide a definitive success rate. However, the House of Commons Briefing Paper No. 6944, dated 11 June 2019, notes that in 2014 60% of CVAs that were proposed failed.

It is therefore imperative to work closely with the Insolvency Practitioner to ensure that the offer presented not only is of benefit to creditors, but is realistically achievable given the company’s circumstances.

Can you sue a company in CVA?

Yes, you can bring a claim against a company that is within a CVA. You will need to review your claim carefully as, if it relates to a liability which became due and payable prior to the date of approval of the CVA, it may constitute an unsecured claim within the CVA and therefore will rank for dividend purposes, as opposed to being a claim you can bring against the company outside of the CVA arrangement.

Will HMRC accept a CVA?

HMRC will vote to accept CVA arrangements. HMRC have a few criteria they will consider when deciding whether to support a CVA or oppose it. One key criteria is that they will consider the company’s tax history and generally are not supportive of companies that are persistently late in making taxation submissions.

It is therefore important to understand the company’s standing with HMRC prior to proposing a CVA and to make efforts to bring the submission of accounts and all different returns to HMRC up to date. The Insolvency Practitioner will likely liaise with HMRC to establish their demeanour early in proceedings.

Is a CVA a public process?

Whilst there is no requirement for any formal advertisement giving notice that your company is entering into a CVA, statutory filings at Companies House are required and therefore it will be a matter of public record that the company is in a CVA.

Do companies survive CVA?

Yes. As CVAs usually run over a period of time, and can fail at various stages throughout the process, it is difficult to provide a definitive success rate. However, the House of Commons Briefing Paper No. 6944, dated 11 June 2019, notes that in 2014 40% of CVAs that were proposed succeeded and therefore these companies will have survived the CVA process.

What is Included Within a CVA Proposal?

The prescribed contents of a CVA proposal are itemised under Rule 2.3 of the Insolvency rules (England & Wales) 2016 which can be accessed at www.legislation.gov.uk. Briefly, a proposal must contain:

A summary of the company’s assets and how the company proposes to use these
A summary of the company’s creditors and how the company proposes to pay these
What guarantees, if any, exist or are proposed as part of the CVA
What the costs of the CVA will be
What the duration of the CVA will be
What credit facilities are being, or will need to be, used by the company going forward
How funds received into the CVA are to be handled

In addition, a number of technical disclosures are required, such as the type of proceedings.

Is a CVA the same as administration?

No. A CVA is a separate process that a company can enter into directly, although it can propose a CVA whilst it is in Administration.

Whilst there are a number of differences in the procedure, two key differences are that if a CVA proposed by the company’s directors is approved, the directors will remain in control of the company, whereas in an Administration the Administrator would take control of the company.

Additionally, a CVA does not automatically provide the company with a moratorium against current and future legal action, unlike an administration.

Is Company Voluntary Arrangement fair?

An insolvency practitioner acting as nominee has a duty to ensure that the CVA proposal is fair. Creditors are able to challenge proposals they deem unfair through the Courts, and the Court has the power to vary or terminate the CVA if they find it to be unfair.

Who can propose a CVA?

A CVA proposal can be proposed by the company’s directors, an Administrator or a Liquidator.

What’s the difference between a CVA and a CVL?

Under a CVA proposed by the directors the company will remain under the directors’ control and will usually continue trading. In a CVL the company’s trading would likely cease immediately upon appointment and the company would be controlled by the liquidator. A CVA is used as a recovery and rescue tool, whereas a CVL is used to conclude the affairs of an insolvent company. Read the Chamberlain & Co guide to Creditors Voluntary Liquidation.

For further information and impartial advice, feel free to give us a call on 0113 242 0808 or e-mail advice@chamberlain-co.co.uk