The Complete Guide to Company Voluntary Arrangement (CVA)

If you find your business in a state of insolvency, exposed to continual pressure from creditors, it may be time to consider a Company Voluntary Arrangement (CVA).

This allows you to keep trading while ensuring your creditors are repaid over time in a manageable way.

So, what is a CVA in business? There’s a lot to understand but this guide provides critical information about a CVA and the process involved.

What is a CVA?

A Company Voluntary Arrangement definition is as follows.

A CVA is a legally binding agreement between a company facing insolvency and its creditors. It allows some of your debts to be paid back over time in a manageable way and provides a means of restructuring your organisation for future growth.

A company CVA also aims to rebuild sales and profits – thus, it satisfies your creditors and allows your business to continue trading and recover from insolvency. A CVA insolvency deal may also include an agreement to sell assets and pay creditors back from the proceeds.

A CVA is governed by a formal process. Consequently, it must be approved by a majority of creditors and shareholders (see Threshold for CVA below).

CVAs are fairly common among businesses as an insolvency solution. It’s also common for companies to propose them if they are struggling with debt but are still a viable business. It allows directors to maintain control of the company and continue trading, whilst paying off debt in a structured way.

What are the benefits of a CVA?

CVAs provide several benefits for companies, directors and creditors, so they can be a good solution for organisations facing insolvency.

• Improve cash flow quickly
• Remove pressure from tax, VAT, and PAYE
• Cut costs
• Allow for employment and lease terminations with no cash cost in certain situations
• Can be cheaper than other insolvency solutions (they don’t involve court unless challenged)
• A CVA insolvency arrangement isn’t publicly advertised (protects customers confidence).
• Prevent a winding-up petition from taking effect

• Offer assurance to creditors that a proportion of debt will be repaid

Creditors may agree to continue trading with the company, often under different circumstances such as pro-forma invoices or cash-on-delivery.

Eligibility for a CVA

A company must be regarded as insolvent to participate in a CVA. However, the goal of a CVA is to pay off debt and preserve the business as a ‘going concern’. The insolvency practitioner should therefore be satisfied the business is operating under fundamentally sound practices and has the potential for future growth.

All parties who enter a CVA must be certain the business can meet the terms of the arrangement and adhere to the repayment schedule. The proposal therefore includes a detailed analysis of the company’s financial situation and projected cash flow.

There must be clear and accurate financial reporting systems in place to ensure the smooth running of the process. A licensed insolvency practitioner (IP) works with the company directors to prepare the proposal. If necessary, they can advise on suitable systems and processes to administer the arrangement.

Irwin Insolvency has a wealth of experience in all industries, and we’re ideally placed to guide company directors through this complex and demanding situation.

Who can initiate a company voluntary arrangement?

For a CVA to be initiated, the business must be insolvent or contingently insolvent.

Most commonly it’s the company directors who propose a CVA. However, it can also be initiated by the appointed insolvency practitioner (IP).

However, if the company is in administration or liquidation, the administrator or liquidator can initiate the CVA instead.

What is the threshold for CVA approval?

The CVA insolvency proposal must be approved by the company’s creditors and shareholders.

Creditors responsible for 75 per cent of the value of the debt must approve the CVA. Shareholders also have a vote and CVA approval requires a minimum of 50 per cent of them to be in favour.

Creditors may ask for modifications to the CVA proposal. Creditors and shareholders must then take a new vote on the revised proposal. For a company CVA to be approved, same voting percentages apply as previous.

Once the proposal is approved, all creditors are legally bound to accept its terms, including those who didn’t vote, didn’t receive notice of the meeting, or voted against it.

The Company Voluntary Arrangement (CVA) process

On average, it takes six to eight weeks for a CVA to be agreed upon from initial contact with an insolvency practitioner. Once the IP has been appointed, it takes approximately four weeks to produce and post the final draft to creditors.

CVA Assessment, Proposal and Approval – An Overview

1. A licensed insolvency practitioner assesses the company’s situation and considers whether a CVA is the most viable solution. The best interests of the company and the creditors are kept in mind when making this decision. Licensed insolvency practitioners will provide quick and impactful professional advice to make the process as simple as possible.
2. The IP carries out a detailed review of the business, its liabilities, its assets and debts to determine if a CVA is appropriate. If so, they prepare a proposal. Directors can agree the proposed terms and suggest amendments. However, the final proposal must assure the IP there is a good chance of success before proceeding to the next stage.
3. The finished and agreed draft of the proposal is filed at court, given a legal originating number, and printed. Copies are sent to the creditors.
4. The creditors have three weeks to consider the proposal.
5. The insolvency practitioner then meets with creditors and shareholders three weeks after the distribution of the CVA proposal.
6. In creditor meetings, there is the opportunity to question the terms of the arrangement, and vote. Creditors do not have to vote in person. They can also vote by post, detailing whether they accept or reject the proposal.
7. If 75 per cent or more of the creditors (by value of debt) accept the proposal and vote in favour, it is approved.
8. A vote between shareholders is also undertaken, where a majority of 50 per cent or more (by debt value) is required for it to be approved.
9. On approval, the IP reports this to the court and all creditors within four days. The issued report details the outcome of all meetings, attendance, and the result of each vote.
10. The CVA takes full effect from the day of the creditors meeting. From this time forward, creditors cannot act against the company, unless there is a default. This will likely result in compulsory liquidation.

Who can challenge a CVA?

Your insolvency practitioner carries out a thorough and transparent process of assessment and consultation. This allows all relevant parties to consider their position, ask questions and request amendments if necessary.

Given the rigour of the process it’s rare for objections to be raised after approval – any contentious issues should already have been addressed.

However, creditors do have a limited basis for challenging an established company CVA.

Creditors can challenge a CVA under Section 6 of the Insolvency Act. However, they only have a small window of opportunity so they must act quickly.

From the date the CVA insolvency is approved, they have 28 days to bring the matter to court.

There are two possible grounds for a challenge:

1. ‘Material irregularity’ – whereby it is alleged there was misconduct or procedural irregularity in the CVA assessment, proposal or approval processes.
2. ‘Unfair Prejudice’ – whereby a creditor believes the CVA is significantly more beneficial to other creditors than themselves, which leaves them in a detrimental position.

If appropriate, the challenge can be made on both grounds and if it succeeds the CVA could be suspended to allow time for a new proposal to be considered.

Depending on the circumstances, the CVA may even be revoked.

Whatever the outcome, there’s no guarantee this will be more favourable for the challenger. The new proposal must still be approved as previous and could leave the challenger with less than before. If a CVA cannot be agreed, the company will end up in liquidation or administration, which may greatly reduce the benefit for all creditors.

What happens if my CVA proposal is rejected?

If either the shareholders or creditors reject your CVA proposal, alternative solutions must be put in place. There are three possibilities:

1. Pre-pack administration – This lets your company sell its assets to a new company to repay creditors. This allows you to sell the business as a going concern.
2. Administration – The running of the company is taken out of the hands of the directors. An administrator will take charge and look for ways to pay off as much debt as possible, including the sale of company assets.
3. Liquidation – Selling off your company’s assets to raise funds to repay creditors. Liquidation always results in the closure of your company and the end of its trading. This is the most likely outcome when a CVA proposal is rejected.

What happens if my CVA is approved?

If a CVA is approved, company debts are restructured based on the proposal. You can start to move towards recovery, changing the way you operate to get your cash flow back in order. Your insolvency practitioner can help you do this as cost effectively as possible. The process may involve:

• Terminating unprofitable contracts – for example, unnecessary suppliers.
• Terminating leases and agreements – anything that isn’t essential.
• Making members of staff redundant – anyone who isn’t strictly needed for the recovery and future profitability of the business.

Once your CVA is active, your company must comply with its terms to maintain protection from creditors. You may need to make regular payments to creditors for several years to complete the agreement. If you miss a payment or fail to comply with its terms, you face the following:

1. Creditors file a winding-up petition against your company and attempt to put you into liquidation.
2. The agreement is modified to reduce the monthly payments and give more time to pay off creditors.

CVAs are designed to provide realistic opportunities for your company to recover, with payment plans that don’t strain your cash flow or prevent the business from functioning as usual. This means there is no excuse for missing a payment.

Does a CVA affect directors?

A CVA is beneficial for directors in several ways. Directors in a CVA company aren’t legally obliged to resign or bring in new people to the senior management team. By contrast, in cases where the company has failed and been placed in administration or liquidation, directors are likely to be investigated.

If the directors played any part in the failure – misconduct or negligence for example – they may face prosecution, disqualification for 15 years, and even a prison sentence in extreme cases.

A CVA insolvency arrangement doesn’t require this kind of investigation as the company hasn’t failed. Consequently, directors won’t be penalised in any way. Indeed, it’s important they continue to run the company in the best possible way to ensure its future growth. They’re also obliged to oversee the efficient administration of the company CVA in accordance with the best interests of their creditors.

If a company is struggling, it can be worth recruiting new team members to encourage a fresh approach. Some management changes may also be wise to bolster the company’s future reputation.

A CVA company is often seen as a credit risk – especially in the early stages of the CVA – and this presents challenges when looking for finance. If new personnel are supporting the existing management team, potential new investors can be assured the company is in safe hands.

Will HMRC accept a CVA?

HMRC is a preferential creditor in insolvency cases, so their acceptance of the company CVA is vital. HMRC won’t support the CVA proposal if there’s evidence of continual mismanagement in the past – for example, persistent late filing of tax returns or yearly accounts, insufficient financial information or persistent tax arrears.

However, if these matters are in order, HMRC is generally inclined to approve a CVA, providing the following criteria are met:

1. The CVA proposal must be detailed, clear and thoroughly researched.
2. The proposal must prove a CVA is more beneficial for the creditors than liquidation.
3. It must therefore establish the company can continue as a going concern without further financial difficulties.
4. Company management must have a clear and realistic plan for restructuring and future growth.
5. The CVA debt repayment schedule and amounts proposed must be realistic and achievable.

How much does a CVA cost?

There’s no fixed cost for a company voluntary arrangement. It depends on individual circumstances. The level of debt, company assets, type of business and future profitability are all considered when preparing the statement of affairs before the CVA is proposed.

Thus, the statement provides a detailed analysis of the company’s current financial situation. Trading projections for the next 12 months are also needed. Fees for these documents are often charged upfront and the amount charged usually ranges between £2,000 and £5,000. The cost depends on the number of creditors, employees, the bank’s position, and the level of negotiation needed.

Ultimately, a company voluntary arrangement (CVA) is a deal between all parties involved in the business, so the financial particulars will vary from case to case.

The insolvency practitioner (IP) charges a nominee fee for drafting the proposal and negotiating its agreement. This fee varies depending on the nature of the arrangement and the insolvency practitioner. However, this fee is taken from the agreed payments that the company makes.

Supervisory fees are charged by the insolvency practitioner every year that the agreement is in place. These fees cover the analysis of the company’s affairs, preparation of the proposal and continued management once the CVA is approved. All costs are clearly detailed in the CVA proposal documents.

Will a CVA show on Companies House?

Once the CVA is approved all creditors and shareholders receive a report detailing the arrangement. This report is also sent to Companies House.

Details of the CVA also appear in various areas such as the company accounts and directors’ reports, all of which must be filed with Companies House.

For example:

1. The debt repayments impact on the financial position of the business will be reflected in financial statements and directors’ reports.
2. Any changes to a company’s assets and liabilities in relation to the CVA must be detailed in financial statements.
3. Any changes to the original proposal, such as amendments requested by creditors, must be noted in reports to Companies House.

Interested parties can access CVA details at Companies House but there is no legal requirement for a CVA to be publicly announced (unlike in the case of liquidation).

FAQs on Company Voluntary Arrangement (CVA)

Will we lose our customers if we enter a CVA?

You will not. If you are delivering your products and services on time and to high quality, it’s rare for customers to walk away.

Should we tell our customers we are entering a CVA?

This decision is up to you, as it should be based on knowledge of the company-client relationship, their requirements, and contracts. If you do tell them, sometimes it’s best to have a CVAadvisor in attendance to dispel myths that you have ‘gone bust’.

Will our staff walk out if we enter a CVA?

This is unlikely as staff who walk out on your business lose their employment rights and will not receive any redundancy, in-lieu-of-notice payments from the company, or DiSB. For many, walking out means financial hardship. They will also not be eligible for Jobseeker’s Allowance. Being open and honest with your employees about your plans may, therefore, be most beneficial to your company.

Why choose a CVA over liquidation?

If a return to profitability is possible with a little restructuring or cash injection, CVAmay be recommended over a voluntary liquidation.

The arguments to save a viable company involve:

• Preservation of goodwill
• Preservation of tax losses
• Avoiding the costs of liquidation
• Avoiding an increase in creditor claims
• Stopping the value of assets plummeting
• A legal and moral obligation to maximise your creditor interests.

If you go into liquidation to avoid paying creditors, you can be disqualified as a company director, be made personally liable, and be pursued for misfeasance or wrongful trading.

Company Voluntary Arrangement – A Brighter Future for your Business

The upheaval caused by the pandemic and various economic crises has created many company voluntary arrangement examples. Charities, hospitality, retail, construction, manufacturing and administration sectors are just some of the organisations facing downturns, restructuring and closures.

However, with the help of experienced insolvency practitioners like Irwin Insolvency, the future may be brighter than you think.

From January 2020 to June 2023, around 582 companies entered a company voluntary arrangement to restructure their debts and survive.

We hope this guide has highlighted how a Company Voluntary Arrangement (CVA) could help your company avoid dissolution and continue to trade.

How Irwin Insolvency Can Help With CVA

Experience and trustworthy guidance are essential for the recovery and future success of your business. You’ll find both at Irwin Insolvency.  

Irwin Insolvency is one of the largest business recovery practices in the UK, serving businesses nationwide. For more than 25 years we’ve advised businesses of all sizes and in every possible industry. We pride ourselves on giving clear, impartial and unambiguous advice.

Our insolvency practitioners have extensive experience in bringing struggling businesses in the UK back from the brink. You’ll be in safe and friendly hands, so don’t hesitate.

For more information on Company Voluntary Arrangements (CVA), get in touch with our licensed practitioners at Irwin Insolvency today by calling 0800 2545122 or emailing us at mail@irwinuk.net.

Contact one of our expert insolvency practitioners today.