Company Voluntary Arrangement

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 professional 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.

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 future plans.

We go into more detail on the differing types of CVA proposals below.

In these type of CVAs, you would repay a fixed monthly amount, calculated from your cashflow projections and normally lasting 60 months (five years). 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.

Because it’s a formal insolvency process, putting forward a CVA requires an insolvency practitioner to agree that your CVA has a fair chance of being accepted and is therefore recommended.

As insolvency practitioners, in order to do this, we need to see evidence that you have gone through each of these steps:

Prior to a restructuring, it’s usual for most of your time to be taken up with cash management, and ‘firefighting’. Now you need to make time for cost analysis and implementation.

Review all aspects of your business to see where savings can be made.

This should include:

• Leases
• Suppliers
• Finance agreements
• Staffing
• Directors / shareholders

If you can bring finance agreements or leases to an end, or find less costly premises, then now is the time to do that. Bear in mind that any shortfall costs or termination charges will be a debt within the CVA, which will limit the effect on cashflow.

A word of warning though – make sure you check for any personal guarantees before ending leases or finance agreements. If you have given any guarantees, a plan will need to be made to deal with them.

Other than the immediate relief you’ll undoubtedly feel, what are the other effects you need to be aware of?

As with other creditors, HMRC will be bound into the arrangement. It is therefore unable to charge further interest and penalties on the money you owe from the meeting date.

However, as your various debts with HMRC are usually accruing on a daily basis, once it has received
notice of the acceptance of your CVA, it will issue a VAT return for the period to the date of the meeting.

It’ll also issue a further VAT return from the period after the meeting until your quarter end. The pre-CVA meeting claim will form part of your CVA debt, and you’ll be expected to pay post-CVA returns on time, according to the usual timescales.

If you’re working with us, we’ll designate an experienced supervisor to your case who will write to you clearly laying out your agreed obligations.

The supervisor will:-

• Collect the contributions or assets as per your proposal
• Agree the creditor’s claims and pay dividends to the creditors
• Review the company’s finances at the agreed time interval

If you and/or your supervisor find that your arrangement needs to materially change, they’ll call a new meeting of creditors and propose the variation to the arrangement.  

If this is accepted by your creditors, the arrangement will continue as per the agreed proposal and the new variation.

Your CVA is brought to a successful conclusion once you have made all expected payments into the arrangement, and your supervisor has paid all outstanding dividends to your creditors.

You are then issued with a certificate of completion, and a final report is filed at Companies House.

Hopefully this will help you prepare for the months and years ahead, however, if you would like to talk to us about any of the above in more detail, contact one of our business rescue experts directly.

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.