A CVA is similar to an IVA, but for companies rather than individuals.
It is a legal procedure that enables a company to make a binding agreement with its creditors and shareholders, describing how the company’s debts and credit liabilities are to be managed, while allowing the company to trade.
From the creditors’ point of view, the CVA serves to achieve one of the following:-
- An immediate full and final settlement of somewhere less than 100p in the pound to settle outstanding debts.
- An agreed delay of payment until an certain event happens.
- An agreement of payments by installments.
A CVA aims to serve the best interests of the creditors and shareholders while allowing the company to continue trading, keeping the work force in employment.
A CVA can only be proposed by a company if it is insolvent. The CVA requires the approval of 75% (by value of the debt) of the voting creditors and approval of a majority of the shareholders.
If approved, the CVA binds all creditors irrespective of how (or whether) they voted and allows the directors to retain control of their company.
Components of a Successful CVA Proposal
The proposal must be reasonable and achievable. It must explain why a CVA is in the best interests of all concerned parties and why the creditors should accept the it. The proposal details all the company’s assets and liabilities and how it is to deal with secured and preferential creditors and those with a direct connection to the company.
There must be a business plan to return the company to profitability, in other words, directors must accept there is a need for change. The proposal must be viable and be likely to be considered favorably by the creditors. Working capital in addition to a review of credit repayments need to be arranged.
Creditors will vote in favour of a CVA if the alternative is liquidation with little or no return to creditors.
See: Advantages of a CVA
Basic Steps of the Procedure:-
- The CVA can be proposed by directors of the company or a Liquidator/Administrator.
- The procedure is administered by a Licensed Insolvency Practitioner.
- A study of the company and its position in the marketplace in made.
- Directors & secured creditors debate the proposal.
- After the proposals are complete, the Nominee needs to prepare a report on the proposals which includes comment on the due diligence they have undertaken to ensure that the CVA proposals are accurate, reasonable and achievable
After the Filing a CVA Proposal:-
- Once filed at court, the proposal is sent to the creditors.
- A meeting is chaired by the advisor or an IP with all creditors (or representative of creditors) at which the creditors vote on the proposal
- Creditors may request modification of the proposal, which will need to be approved by vote.
- A shareholders meeting is held on the same day, but after the creditor’s meeting. This requires a 50% vote in favour of the CVA Proposal.
- Once a decision is made, the meetings close and a report is issued by the chairman within 4 days.
- Once approved, all creditors are legally bound by the proposal.
- After approval, the company makes agreed contributions to the trust account.
CVA – Frequently Asked Questions.
What should I do before committing to a CVA?
Always consult with your accountant before signing anything. Your accountant will be able to offer you the best advice, both for you and the company. Your accountant can advise you on many things when it comes to your company’s finances, including payroll, tax appeal and commercial mortgages.
For a highly specialised accountant in London, we recommend Graham Chartered Accountants – visit their website at www.dmostmoney.com.
As well as this, they offer payroll services for umbrella companies in the healthcare sector.
How much does the company repay its creditors?
Having reviewed the financial position and the company’s prospects we would sit down with the directors and calculate what the company can afford to pay into a segregated fund, typically but not always, on a monthly basis.
Will the bank, VAT and the Inland Revenue support the CVA?
In essence a CVA allows a company with historical cash flow problems to repay its liabilities, either in part or in full (including the Inland Revenue and VAT) over a period of time. Once the company’s liabilities has been restructured any monies generated by the company e.g. book debts can be used as working capital rather than paying its old debts.
Generally, they will not be problems with a CVA proposal that adheres to common sense. As the bank is normally secured (as are any finance companies), it remains outside the CVA and with all pre CVA creditors showing in the segregated fund, the pressure is taken off, because you have fresh and unallocated working capital coming in to the company.
Will suppliers still supply and support the company?
It is our experience that nearly most suppliers will continue to support a company in a CVA. Find out more.
Does anyone interfere with the running of the company during a CVA?
As long as the company adheres to the terms of the CVA, the company is run under the control of the directors without any outside interference. There are certain reporting requirements to a CVA Supervisor, but there are normally simple and brief.