A CVA, or company voluntary arrangement, is a formal insolvency process between an insolvent company and its creditors.
The insolvent company applies to its creditors to suspend all contractually agreed repayment terms, and enter into a new, contractually binding arrangement to repay creditors only what it can afford, on terms that its cashflow allows.
We discuss what makes a successful CVA and how they work in more detail below.
Interesting fact: CVAs account for only 2.5% of the formal corporate insolvency market. Liquidation and, to a lesser degree, administration are more popular restructuring tools.
A CVA is a legal agreement for the reorganisation of a company’s debts.
If your company is insolvent, you could potentially look to restructure its debts by proposing a CVA. As you would look to only offer what you could afford over an agreed period, this could mean that a percentage of your debts would be written off. Furthermore, interest and charges would be frozen once the CVA was accepted.
As it’s a formal insolvency process, you’d need to work with an insolvency practice to organise this. From our side, we’d first ascertain whether a CVA was viable, and then work with you to draft proposals to send to creditors. Your creditors would then vote on the proposals, and as long as over 75% in value voted in favour, the CVA would be accepted and would be binding on all unsecured creditors.
How do we ensure a successful CVA process? Firstly, we closely review your company’s financial information. Based on your circumstances, we work with you to formulate an achievable repayment plan for your creditors. This is worked out from your business’ projected profit and cashflow, any material asset disposals, seasonality or other trends, and discussions with your major creditors.
Yes, CVA proposals should fit around your exact business. Not only should they allow enough flexibility for future changes, but they should be built around the business’s plans. To give you more information, we’ve included some examples of different types of CVA proposals here:
In these type of CVAs, you would repay a fixed monthly amount, calculated from your cashflow projections and normally lasting 60 months. An example would be a company owing £300,000 and repaying £3,000 per month over 60 months.
This would allow a significant debt write off, but the business would be committed to finding £3,000 per month for 5 years. Although this is the most popular type of CVA, it is sometimes not the best option as by being fixed, it is unlikely to have taken account of the vagaries of your business and fluctuations of its future business cycles.
These types of CVAs can work, but due to their inherent inflexibility, they are most likely to be the ones that don’t last the full agreed CVA term.
This CVA type is based on your business repaying either variable amounts, as defined by the projected peaks and troughs for the business calendar, or flexible amounts depending upon agreed calculations based on turnover.
As with the above example, if the business owed £300,000, you could propose to repay 4% of monthly turnover, for example, allowing you greater cashflow planning. Depending on your finances, you would still be eligible for significant debt write off and because this arrangement is written with more flexible terms, the CVA is more likely to be successful.
As above, but this CVA type also allows, or has potential for releasing assets into the arrangement. This works very well where the company owners are contemplating a sale of whole or part of the business, but need more time to organise it.
For example they may make contributions for a 12 month period on a seasonal basis, and organise the sale of a division at the end of the year. It may well be that the division sale brings the CVA to a successful conclusion at that point. In case the sale didn’t complete or was delayed, a good CVA proposal would contain a pre-agreed alternative, such as continuing to pay contributions for a further period in lieu of the expected sale proceeds. By trying to foresee obstacles and building alternative scenarios into the proposal, the CVA has a stronger chance of success.
As we mentioned above, CVAs account for only a small fraction of the corporate insolvency market. This is because they often aren’t the most suitable restructuring tool.
When you are putting together CVA proposals, you must be sure to work with an insolvency practice that has taken the time to understand your business and to draft appropriate and flexible terms.
A CVA can be an excellent restructuring tool, but there are a few key questions we always look to answer when deciding suitability:
1. Is there a standout reason for the current cashflow difficulties?
2. Is there strong management in place?
3. Does the business have a clear and realistic plan moving forward?
4. Does the plan correlate with the historical figures?
5. How does the business compare against industry averages?
6. How far back does the HMRC debt stretch?
7. Are key creditors supportive?
8. Are funders supportive?
As a firm, we will only put forward a CVA proposal where we believe it has a fair chance of success. It is estimated that 40% of CVAs fail, so it is important when considering a CVA to understand the alternatives prior to doing so.
Have we answered all your questions about CVAs? If we’ve missed anything, or you would like to discuss this in more detail, get in touch with one of our business rescue experts directly.
If you are wondering how much a CVA might cost you, try our online calculator.