If your small business struggles to meet its debts and overheads, a Company Voluntary Arrangement (CVA) can provide an alternative to the company entering into administration.
There are risks associated with the process, so we’ve created this short guide to ensure you understand what a CVA is.
What is a CVA?
A CVA is a legally binding agreement with your company's creditors and shareholders which allows a company that is insolvent to repay its unaffordable debts over a period of time.
CVAs are governed by the Insolvency Act 1986. It’s a formal agreement between a company and its unsecured creditors. A CVA is implemented under the supervision of an insolvency practitioner.
Typically, a Company Voluntary Arrangement will reduce and/or reschedule the company’s debts. The CVA is approved if 75% (by debt value) of the creditors who vote agree during the creditors meeting.
How long does a CVA last?
It depends on the agreement you reach with your creditors, but usually, a CVA lasts between two and five years, although it can go on for longer.
How much does a CVA cost?
There are costs associated with proposing and entering into a CVA, including producing a Statement of Affairs and the Insolvency Practitioner’s fee for drafting the proposed CVA and supervising the arrangement.
However, these costs dim when compared with the expense of other insolvency solutions. CVA costs can come from the payments you make to creditors if you do not have funds available to cover them.
What are the advantages and disadvantages of a CVA?
Advantages of a CVA
- As long as a creditor does not challenge the CVA, you do not have to attend court, making it cheaper than other insolvency procedures
- The company’s directors remain in control of the company whilst the CVA is in place
- Pressure from creditors and HMRC is withdrawn whilst the CVA is being prepared
- CVAs are private and, therefore, will not be notified through The Gazette as in the case of insolvencies
Disadvantages of a CVA
- The company will find it difficult to access credit during the CVA’s term
- Your company can be liquidated if you breach the CVA’s terms
- It can take many years to pay off the company’s debts under a CVA
How does a CVA affect employees?
Because a CVA allows the company to continue operating whilst making agreed payments to unsecured creditors, the terms and conditions of the business’s employees remain unchanged.
However, the CVA may require a significant restructuring of the company, including making some staff redundant. If this is the case, you must follow legal redundancy procedures to ensure you do not face unfair dismissal claims.
You must give the employees your making redundant the reasons for the redundancy and and tell them why they have been selected. You will also need to discuss any other options for employment in the business.
There are collective consultation obligations where an employer proposes to dismiss 20 or more employees for redundancy within a period of 90 days under s.188 Trade Union and Labour Relations (Consolidation) Act 1992.
When making redundancies it is important to understand how much a person is entitled to and this is where statutory redundancy pay comes into play.
What happens to shareholders in a CVA?
Unlike other insolvency processes, a CVA means that the shareholders remain in control of the company and stand to benefit from its success. It is, however, very unlikely that shareholders will receive dividends during a CVA, nor will they have the voting power to reject the terms of the CVA.
Get legal assistance from LawBite
Applying for a CVA can be a stressful experience. If you’re considering applying for a CVA it’s best to seek legal guidance to find out whether it’s the best option for your business.
To find out how we can help you by discussing your options concerning the CVA proposal with your company’s creditors or by drafting the relevant documentation, book a free 15-minute consultation or call us on 020 3808 8314.