A Company Voluntary Arrangement or CVA is a formal process set out in the Insolvency Act 1986. The directors of a company or, if the company is in Administration, the Administrator, make a formal proposal to the company’s creditors offering to pay an amount to creditors in satisfaction of their debts over some period of time.
Creditors must agree to these proposals but the CVA often involves creditors agreeing to accept less than they are due if this is the best outcome that is achievable in the circumstances.
Such a payment to creditors may be made from a variety of different sources including:
1. Trading receipts
A company may have a sound underlying business but may be experiencing financial difficulty as a result of its liabilities. It may be possible to put together a plan which effectively “freezes” the current debts and enables the company to carry on trading.
These “frozen” creditors would be paid from the trading surplus that the business is now able to generate going forward.
2. Sale of Assets
The Insolvency Act does not proscribe what detailed proposals directors may or may not make. Consequently directors may offer to sell certain assets, for example, superfluous plant or a building, and agree to pay creditors an amount from the sale proceeds.
Given the current state of the property market (both commercial and residential) creditors may allow the company some time to maximise the sale price.
3. Sale of the Business
Clearly selling the business may be a very attractive option and the CVA would provide the directors time to realise the best price for the business without the pressure from creditors who may be threatening to take legal action to enforce their debts.
4. Capital Injection
The directors may propose raising new financing and using some or all of these funds to pay creditors a proportion of what they are owed.
The CVA proposal might last up to 5 years (or longer) and will enable the directors to carry on trading and retain control over their company.
A Licensed Insolvency Practitioner is appointed who assists the directors in putting together the CVA proposal. He is then known as the Nominee.
Once the proposal is agreed by creditors the Nominee becomes known as the Supervisor.
As Supervisor he is responsible for monitoring the CVA, reporting to creditors, collecting the cash surplus from the directors and paying it to creditors.