One story that has gone under the radar for the past few months has been the continuing growth of Company Voluntary Arrangements (CVAs).
Why are hundreds of businesses using this process to keep trading and rebuild their profitability?
How are directors able to benefit from them and how do they differ from an administration?
The story of CVAs
| 2019 | 2020 | 2021 | 2022 | 2023 | 2024(to Jun) | |
| CVAs | 335 | 260 | 115 | 111 | 186 | 122 |
Figures supplied by The Insolvency Service
CVAs have always been a useful and reliable debt consolidation measure for otherwise viable businesses that can’t get out from historic and debilitating arrears.
This can be seen in the numbers that pre-pandemic there were six businesses a week entering the process which then reduced by over 50% in 2021 and by 66% in 2022.
Due to protective measures rolled out by the government during the early stages of Covid-19 such as suspending winding-up petitions and statutory demands many directors took the opportunity to close their businesses down instead of restructure their debts meaning that hundreds of otherwise profitable companies went out of existence.
The change of circumstances and withdrawal of support means that while directors face the same dilemmas today, they are recognising the benefits of a CVA more.
2023 saw the first annual rise in CVAs for four years and by the end of Q2 2024 there were more CVAs than in the whole of 2021 and 2022 and they are on course to reach their highest levels since 2020.
Up to and including the end of July, CVAs have increased for five consecutive months so they are definitely back in fashion and favour.
What is the difference between an Administration and a Creditors Voluntary Arrangement?
The primary difference between administration and a Creditors’ Voluntary Arrangement (CVA) lies in their objectives and day-to-day control over the company.
Administration is a formal insolvency procedure where an external administrator takes control of the company with the goal of restructuring the business.
They’re able to protect it from creditor actions while they look to make sufficient changes to reverse losses and achieve the best outcome for creditors other than liquidation. This could involve a whole or part sale to new owners or investors or other options.
In contrast, a CVA is a negotiated agreement between the company and its creditors to restructure and repay debts over time, allowing the company to continue trading under the control of its directors with a significant proportion of existing debts written off in return for a guaranteed monthly repayment of the remaining debt to be shared amongst creditors.
While administration involves handing control to an external administrator, a CVA allows the company’s directors to remain in control, with oversight and support from a licensed Insolvency Practitioner.
How does a CVA work?
There are five main and straightforward stages to a CVA process that follow on from each other:-
- Assessing the company
After directors agree that they want to explore a CVA procedure, an insolvency practitioner is appointed, alongside advisors, to work with them to prepare the CVA proposal. This must be fit, fair and feasible and should include detailed financial forecasts so every party understands how it will operate at each stage. This provides proof that a company can continue to run as normal during the process.
- Proposal Drafting
The proposal draft should be discussed with creditors and shows how the CVA will maximise their interests as opposed to a liquidation. All parties should agree on how debt is to be repaid.
- Discuss the proposal
The proposal is then filed with the court and copies are physically sent out to all creditors. They then have a minimum of 17 working days to consider the CVA proposal and their response before the creditors meeting is held.
- Creditors Meeting and Voting
At the meeting, creditors take a vote on whether the CVA can go ahead. In order for this to pass a minimum of 75% of creditors must vote in favour of the proposal in order for it to be approved.
- Implementation
The insolvency practitioner is named in the meeting as the CVA supervisor and they will be in charge of collecting payments each month to distribute to creditors, usually on an annual basis.
If any of this brief information is setting off some possibilities in your mind then a CVA could be the perfect solution to continue running your business and get out from under crippling debt repayments that are holding back its growth and expansion.
We offer a free initial consultation for any business owner or director who wants to discuss the circumstances their company faces in further detail and explore what options are available to them – whether it’s a CVA or other process that might be more appropriate or beneficial to them.
Get in touch today and together we can get to work to make the rest of 2024 the platform your future success is built upon.