Company Voluntary Arrangement

If your clients main hurdle to profit is making their monthly debt repayments in full and on time then it might make more sense to tackle these debts holistically with a CVA.

A Company Voluntary Arrangement (CVA) is a formal insolvency process agreed between a company and its creditors where, in return for a proportion of debts being written off, the company agrees to pay back a lower proportion of the remaining collective debt in those regular monthly instalments until cleared.

It’s a way for a company to remain trading and have certainty around its debt while it restructures itself to hopefully come out stronger and more profitable at the end of the process – and debt free.

In 2023, there were 186 CVAs in England and Wales – approx 0.5% of all total insolvencies – which is to be expected because they are a specialised restructuring tool. 

As such they should only be considered if they have a reasonable chance of success and that the terms agreed to are flexible enough and appropriate. 

There are several questions we always ask when deciding on the suitability of potential CVAs for businesses. These are:-

• Is there a specific reason for current cash flow difficulties?
• Is there a strong management team and structure in place?
• Does the business have a clear and realistic plan moving forward?
• Does the plan correlate with existing and historical data?
• How does the company’s performance measure against industry benchmarks?
• How far back does any HMRC owed debt stretch?
• Are key creditors supportive or likely to be supportive?
• Are other funders supportive?

Approximately 60% of CVAs succeed and we will only take a CVA proposal forward if we believe it has a decent chance of being successful. 

This is why it is crucial for directors to understand all insolvency alternatives including CVAs.

While there is no way to guarantee a successful CVA process, there are several key indicators we’d focus on with respect to your clients’ financial information to help work with them and you on formulating an achievable repayment plan for their creditors. 

We’d base this on their projected profit and loss statements and cash flow; any material assets disposals; considering seasonality or other appropriate trends as well as having discussions with their major creditors.

As every business’ circumstances are different, so are the CVA proposals that will best work for them. 

Generally they should be flexible enough to allow for any future changes while also continually providing suitable value to creditors. 

• CVA based on fixed contributions

These are the most popular forms of CVA where a fixed amount is repaid monthly, calculated on cash flow projections and usually lasting 60 months – five years.  For example, a company repaying a collective debt of £300,000 would repay £3,000 a month. 

While this could allow a significant debt write off, the business would still have to commit to finding £3,000 a month for five years.  

For some businesses this would be ideal but for others that have different fluctuations in their business cycle or other inherent vagaries and factors then they could consider another kind of CVA. 

• Seasonal or trend-based contributions

This CVA allows a business to repay either variable amounts defined according to projected peaks and troughs in the business calendar or flexible amounts based upon agreed calculations in relation to turnover.

Under this arrangement, a company owing £300,000 could propose to repay 4% of monthly turnover instead of a fixed amount. This would give them greater cash flow planning and because of the flexibility, this CVA is more likely to be ultimately successful.

• Seasonal or trend-based contributions and/or asset release

 This CVA variation works in the same way as the one previously mentioned but also allows for releasing company assets into the arrangement.  

This can work well when company owners are also contemplating the sale of the whole or part of the business but need more time to arrange it.

For example, the business can make contributions for a 12 month period of the CVA on a seasonal basis and organise the sale of certain assets or a division at the end of the financial year. 

If this is successful then it could generate enough funds to bring the CVA to a successful conclusion at this point. If the sale doesn’t complete in time or is delayed then the CVA proposal could include a pre-agree alternative arrangement such as continuing to pay contributions for a further period in lieu of the expected sale proceeds.  

Foreseeing obstacles and building alternative scenarios to overcome them into any CVA proposal would give it the strongest possibility of success.

If a business can demonstrate that it is seriously cutting back on expenditure and costs then it has a better chance of having a CVA proposal accepted by creditors. These can include:

• Renegotiating leases with landlords
• Reaching better terms with suppliers
• Paying off or restructuring financial agreements and loans
• Staffing changes

Directors should remember that any shortfall costs or termination charges will be classed as debts within the CVA which will limit their effect on cash flow.

If money is owed to the current banking provider, the business should also seek to open a new bank account elsewhere prior to the CVA being proposed. This is due to the fact the company bank account will likely be frozen once the proposals are circulated and any money set off against the bank debt.

Once a CVA is accepted by creditors then some things will change for a business but others will remain as they were. 

From the point a CVA is accepted then the following all apply:

• All unsecured creditors are bound by the terms of the CVA 
• All existing creditors interest and charges are frozen
• Any ongoing legal actions will cease
• The business will only make payments on unsecured debt from that date as per the terms of the proposal. 

If HMRC are one of the creditors then they will also be bound under the terms of the arrangement and will be unable to charge any further interest and penalties on any money owed from the date of the meeting. 

However, as debts owed to HMRC accrue on a daily basis, once they have received notice of acceptance of a CVA they will issue a VAT return for the period to the date of the meeting and will also issue a further VAT return from the period after the meeting until financial quarter end.

The pre-CVA meeting claim will form part of the agreed CVA debt but post-CVA VAT returns are not and should be settled on time according to usual timescales.

Each CVA case will have an experienced supervisor attached to it who will be your client’s liaison and contact for any queries or concerns. 

In the first instance they will write to them to clearly layout their agreed obligations and will also:

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

The last point is important – if the financial conditions at the business materially change then it’s the duty of the supervisor to convene a new meeting of creditors and propose a variation of the agreement. If accepted, the arrangement will continue as per the agreed proposal and the new variation.

If your client makes all the expected payments under an arrangement and the supervisor has paid all outstanding dividends to the creditors then the CVA can be brought to a conclusion. 

They are issued with a certificate of completion and a final report on the CVA is filed at Companies House.

If you or they have any questions about CVAs then please get in touch with one of our team of expert advisors directly.