Company Voluntary Arrangements
A company voluntary arrangement (“CVA”) is essentially an agreement between a company and its creditors where all creditors can be bound by a decision of the majority. It is generally used to ensure the survival of a company as a going concern where it has encountered financial difficulties and has become burdened with historic debt.
The directors would seek the assistance of an insolvency practice. A proposal document would be drafted for the consideration of the creditors. That proposal document would explain the financial position of the company and what would be the outcome for creditors if it were to close, probably through either a voluntary or compulsory liquidation procedure. It would explain how that financial position arose; how it is proposed that the company’s fortunes will be changed; and what benefit could accrue for creditors as a result of those changes.
It is a request to creditors to put a hold on outstanding accounts, allow the company to trade on with changes that will reverse it fortunes, to give a result where additional funds can be generated to ensure that creditors will get a better return that they would receive if the company were to close down.
A CVA proposal will include
- Extracts from the company file at Companies House.
- A brief history of the company.
- Summaries of previous filed final accounts.
- Forecast statements to show what the next 12 month’s trading will achieve.
- An estimated statement of affairs disclosing the company’s assets and liabilities (essentially a balance sheet on a break-up basis)
- An estimated outcome statement showing what creditors could expect to receive if a proposal were to be accepted, or rejected.
The company would propose, or nominate, an insolvency practitioner to act in relation to the proposal (“the Nominee”) and would propose that if an agreement for a CVA can be reached with creditors then the insolvency practitioner should supervise its conduct, thus becoming “the Supervisor”.
The company would remain under the control of its directors subject to the supervision of insolvency practitioner.
There are a number of terms that are incorporated into almost all CVAs but the essential basis of any proposal and offer to creditors can be flexible.
It must however always be borne in mind that an agreement requires benefit for both parties.
A proposal that does not benefit creditors will not be accepted. A meeting will be convened to consider any proposal and creditors will be asked to vote on its acceptability.
It requires 75% of voting creditors to approve a proposal for it to be implemented. Where any of those creditors are associated with the company it will also be required that 50% of non-associate creditors approve the proposal.
It should be noted that approval of a CVA is no guarantee of survival of a company.
The company must adhere to its terms. Failure to do so will result in the failure of the arrangement and probable liquidation.