A CVA is usually for companies which are essentially sound but are either experiencing cashflow difficulties or have bad debts which they are struggling to recover.
As a director, you will make a proposal to creditors which will establish how much the company can afford to pay over a period of time.
The information in the proposal should be backed up by a business plan and projected cashflow forecast.
The proposal will also detail how much creditors should expect to receive and whether this will be a full or partial payment. It will also highlight when the creditors can expect to receive such dividends.
Your company will then make all necessary payments to a designated client account that is supervised by the insolvency practitioner, whose role is to ensure that the payments are being received on time. Once a sufficient pot of funds has accumulated, this is distributed to creditors….
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Any CVA must follow the procedure set out in statute. We will assist the Board and the Company with the preparation of proposals for a CVA and arranging the subsequent decision procedures of creditors and of the Company to seek approval of the proposals, including drafting notices, minutes and other documents where appropriate, but the ultimate responsibility remains with the Board. The following main steps must take place in each appointment:
The following main steps must take place in each appointment
We must set out our changing role and discuss the options available in a fair manner and consider the Company’s circumstances before the Board decides on an appropriate solution to its current difficulties.
When the Board is happy that it understands the options and our advice, it will be asked to confirm that it agrees.
We will help to draft the Company’s proposals and statement of affairs from information that the Board provides, but the Board should note that they remain their documents and the directors may be held liable if they omit information from, or include wrong or misleading information in, the proposals that others subsequently rely on when approving the proposals.
In addition, if any information is omitted, or incorrect or misleading information is included, the proposals may be rejected or any approved CVA may be challenged.
This could result in the Company being in a worse position than if it was wound up now without first attempting a CVA.
We will help draft and submit notices to the Court and to the Company’s creditors and members in connection with the decision procedures to approve the proposals.
If any creditor is threatening or taking court action the Board should advise us as a matter of extreme urgency so that we can consider applying to have their action halted while the proposals are drafted and submitted for approval.
Once the Company’s proposals are finalised and the required notices have been issued a decision of the creditors will be sought to consider the proposals.
Proposals are only approved when 75% or more of those voting in the decision procedure have approved them. Creditors may propose amendments to the proposals and if they do the proposals cannot be approved until the directors have agreed to the modifications.
The forthcoming interview will deal with some common modifications so that the Board have some advance warning of potentially onerous modifications and so do not have to make a decision without time to consider them properly.
At the same time as sending notices of a decision procedure to the creditors, the members of the company will be invited to a meeting to consider the proposals. A resolution is passed by the members at the meeting of the company when a majority (in value) of those voting have voted in favour of it.
After the appointment, the Supervisor is required to issue a variety of notices for the attention of the court, other statutory bodies such as HM Revenue and Customs, Companies House, and the creditors generally.
As explained above, once appointed Supervisor our IP’s main duty will be to the creditors; to monitor the progress of the arrangement and enforce the arrangement terms, including any modifications that may be proposed and accepted by the directors and the creditors. If the Company is unable to maintain the arrangement payments, or otherwise defaults on the agreed terms and an acceptable variation cannot be agreed, the Supervisor may have to fail the arrangement and potentially could even have to petition for the Company to be wound up.
The Board will be required to co-operate with the Supervisor in providing information about the Company’s income and expenditure and copies of its management and other accounts from time to time and making any increased payments that he may require.
It is important that the Board realises that if the Company enters a CVA which subsequently fails, resulting in the Company being wound up, the Company may be in a worse position than if it was wound up now without first attempting a CVA.
The Supervisor will deal with enquires from the directors and the creditors promptly and will report periodically on the progress of the arrangement, including the level of costs, any changes and any other sources of income for the Supervisor or the practice in relation to the case.
The Supervisor will report if the costs of the arrangement increase beyond previously reported estimates, and will close the CVA promptly on completion or termination.
We will not be able to start drafting proposals until we have received all of the information requested in the engagement letter, together with an updated business plan and cashflow forecast and details of the measures that the directors intend to take to avoid recurrence of the Company’s financial difficulties.
Failure to provide any of the information could delay the whole process. When drafting proposals we may require further information and we will need some documentation signed and returned. Failure to provide prompt answers to queries or delay in returning signed documents could result in delay. It is essential that you provide complete and accurate information about all of the company’s assets and dealings.
Providing inaccurate or misleading information in an attempt to procure approval of an arrangement is an offence and could result in delay or rejection of the proposals.
If it is discovered after the proposals have been approved, it could result in the failure of the arrangement and the Company may be wound up. You should complete any outstanding tax returns and submit them to HMRC before the proposals are issued to creditors.
HMRC will not approve proposals if returns are outstanding so failure to complete the returns could result in delay or the rejection of the proposals.
If a creditor is bound into the arrangement without receiving notice then they can appeal to court. Similarly, any creditor can appeal to court within 28 days of the approval of the arrangement if they consider that they have been treated unfairly or they can show that the arrangement should not have been approved.
Exceptionally, it may be possible for a creditor to appeal out of time if the court permits and the company and the creditors can apply to the court to have any act, omission or decision by the Supervisor reviewed.
The court can make whatever order it sees fit in the event of a challenge or appeal. It may revoke the approval of the arrangement with or without ordering that a fresh decision procedure should be convened.
It can order specific action by the Company or the Supervisor to rectify matters and it can make an order for the costs of any application and complying with any consequential orders.
Consequences if the CVA is not approved: If the CVA is not approved, the Company will remain in its current situation. It will have no protection from recovery action by its creditors and the Board will remain in control of it. We will be able to advise the Board further in that situation, but it is likely to need a further insolvency procedure. Because of the delay caused by proposing an arrangement the Company may owe more money and may be in a worse position than if it had entered an alternative insolvency procedure immediately without first trying an arrangement. If a creditor has petitioned for the Company to be wound up and has suspended action or had the petition adjourned to allow the proposals to be considered, then if the proposals are rejected they may be able to get the Company wound up quickly.
Consequences if the CVA is not successfully completed. If the proposals are approved by the required majority, but the arrangement subsequently fails, the arrangement terms may require the Supervisor to petition for the Company to be wound up. Because of the time elapsed, costs incurred in supervising the arrangement and additional cost of petitioning, the Company may be in a worse position than if the Company were wound up now without first attempting a CVA. As an alternative to petitioning, it may be possible for the Company to be wound up voluntarily, with the Board convening decision procedures of the members and creditors to place the company into Liquidation instead of applying to court for a winding up order. In some circumstances this can be a quicker solution than applying to court. Another possibility is that the Company may be put into Administration if there is a chance that the business can be preserved or that a better result can be achieved that way rather than immediately entering Liquidation. If that happens an Administrator has a range of options he can pursue, including, but not limited to, trading the Company before either selling the whole or part of it, arranging for an immediate sale of all or part of it without trading, or simply closing the Company down and disposing of the assets. It is even possible, but less likely, that the Arrangement could be terminated without further action, leaving individual creditors to take enforcement action in due course that might result in action to recover assets or a petition for winding up.
Directors or Board Members remain in control of the company and they continue to trade whilst enabling the company to repay creditors who are trade creditors, HM Revenue & Customs and landlords. They are otherwise collectively known as the unsecured creditors.
Stops a Winding up Petition
Can be a lower cost involved compared to other forms of insolvency procedure
Unlike any other corporate insolvency processes, there is no investigation into either you the directors, or your business.
Unlike Administration where clients, employees have to be notified about the process, CVA are not public and there is no requirement for the business to notify customers and is dealt privately between the company and its creditors. Once the CVA is being accepted, creditors are prevented from threatening or taking any legal action for example instigating winding up petition against the company.
Secured creditors who are usually banks and finance companies are not included in the CVA
Failure to keep up with the repayments can lead to legal action against the company by the creditors.
CVA can run for 3-5 years
Future credit may be problematic as some lenders or suppliers may not be willing to extend credit in the future once you have entered CVA
Once the process of CVA ends the company is released from its obligations and any remaining debts that were included in the agreement are written off. A company voluntary arrangement (CVA) is a way to turn around a struggling company and make it profitable again.
If you want to discuss whether CVA is an option for you, contact us on 0800 093 4270 or live chat with us. Alternatively, you can complete our enquiry form and one of our CVA Insolvency Practitioners will be in touch with you.
Should you need help in liquidating your company, contact us on 0800 093 4604 or live chat with us. Alternatively, you can complete our enquiry form and one of our Liquidation Insolvency Practitioners will be in touch with you.
If the CVA is rejected, other options the company is left with are
If the company is under pressure from HMRC and can’t afford to pay arrears for VAT, PAYE and other taxes, it can propose A CVA. HMRC will consider the CVA and decide similar to another creditor.
If the company has received a statutory demand from a creditor, proposing a CVA can halt the attempt to recover the debt and stop a winding up petition from being served. In a way it will bring an end to some creditor pressure, provided the company who has received winding up petition has taken necessary action and not left it till the last moment.
On entering into CVA, the relationship with the suppliers can be affected if a particular supplier provides a credit to the business. However, some suppliers can be considerate, knowing your situation and continue a working relationship.
Normally, CVAs last for between two and five years, but for some CVAs can last for more than five years depending on the company’s financial situation and its ability to pay its creditors.
The amount of time to enter a CVA takes between 4 and 10 weeks, from preparing the CVA to the CVA being accepted by creditors and implemented.
If the company has made all the payments to creditors that has been agreed, the remaining unsecured debts are written off, and the business can continue trading as normal without previous debts.
Once you enter into a CVA it is better to tell the key customers that the company is involved into CVA than allowing them to hear from other sources.
If continuing trading is in the interest of your company’s creditors, as a company director you should continue trading as normal.
As they are personal guarantees, they cannot be removed unless the debt is paid off
A CVA is useful when the company is experiencing cash flow difficulties or have bad debts which they are struggling to recover.
For a CVA to be approved, 75% of the creditors who are owed money have to agree to the proposal. A CVA can only be entered if it is felt that the company can get itself out of the debt and will at some point become profitable again.
Whereas a company is in administration when it becomes insolvent and is placed under the management of a Licensed Insolvency Practitioner who acts as an administrator. The role of the administrator is to take control on the company’s assets and business to repay creditors. During this time, it is protected against legal action by creditors and nobody can apply for a wind-up petition.
Impact on the Business