Company Voluntary Arrangements (CVAs) are a popular option for struggling businesses in the UK. Read this post to find out more about CVAs:
Reading guide
- 1 What is a CVA?
- 2 Why choose a CVA?
- 3 How does a CVA work?
- 4 Who can propose a CVA?
- 5 What debts can be included in a CVA?
- 6 How long does a CVA last?
- 7 What happens if the company cannot make the payments?
- 8 What are the advantages of a CVA?
- 9 What are the disadvantages of a CVA?
- 10 Who can help with a CVA?
What is a CVA?
A CVA is a legally binding agreement between a company and its creditors, which allows the company to repay its debts over a fixed period of time, typically 3-5 years. The agreement is overseen by a licensed insolvency practitioner (IP), who is appointed by the company’s directors.
Why choose a CVA?
A CVA can be a good option for a struggling company because it allows the company to continue trading while it repays its debts. This can help to preserve jobs and keep the business afloat. Additionally, a CVA can help to avoid more drastic measures like liquidation or administration, which can be expensive and disruptive.
How does a CVA work?
Once a company has decided to pursue a CVA, it must propose a repayment plan to its creditors. This plan must be approved by at least 75% of the company’s creditors by value, and then sanctioned by the court.
Once the CVA is in place, the company must make regular payments to the IP, who will distribute the funds to the creditors in accordance with the agreed plan.
Read also: Do You Know How Can You Raise Money for Your Business?
Who can propose a CVA?
A CVA can only be proposed by the directors of a company, with the assistance of a licensed insolvency practitioner. Creditors cannot initiate a CVA.
What debts can be included in a CVA?
Most unsecured debts can be included in a CVA, including trade debts, tax debts, and bank loans. However, some debts are excluded, such as secured debts (e.g. mortgages) and debts owed to employees (e.g. unpaid wages).
How long does a CVA last?
A CVA typically lasts between 3-5 years, although it can be longer in some cases. During this time, the company must make regular payments to the IP, who will distribute the funds to the creditors.
What happens if the company cannot make the payments?
If the company is unable to make the payments outlined in the CVA, the IP may terminate the agreement and the company may be forced into liquidation or administration.
What are the advantages of a CVA?
There are several advantages to a CVA, including:
- The company can continue trading while it repays its debts.
- The company can negotiate with its creditors to reduce or write off some of its debts.
- The company can avoid more drastic measures like liquidation or administration.
- The company can preserve jobs and maintain relationships with suppliers and customers.
What are the disadvantages of a CVA?
There are also some disadvantages to a CVA, including:
- The company must make regular payments to the IP, which can put a strain on cash flow.
- The credit rating of the company can be affected.
- The company’s directors may be required to give personal guarantees for the repayment plan.
- The company’s creditors may be hesitant to agree to a CVA, as they may prefer to pursue more aggressive measures like liquidation or administration.
Who can help with a CVA?
A licensed insolvency practitioner can provide advice and guidance on whether a CVA is a right option for a struggling company. They can also assist with preparing the CVA proposal and negotiating with creditors.
