When a business faces serious financial difficulties, there are several insolvency procedures available that may help it avoid collapse. One of these is a company voluntary arrangement (CVA) - a legally binding agreement that allows a company to work through its debts while continuing to trade.

Used by company directors who believe the business remains viable, a CVA involves proposing new terms to repay creditors over time. If agreed, it can provide breathing space from legal action and help bring the company’s affairs back under control. The process must be overseen by a licensed insolvency practitioner and supported by a majority of the company’s creditors.

In this guide, JMW's restructuring and insolvency solicitors explain what a company voluntary arrangement is, what it is used for, how the process works and what creditors and company directors can expect at each stage.

What Are Company Voluntary Arrangements For?

A CVA is designed for businesses that are experiencing cash flow problems or creditor pressure but still have a realistic chance of recovery. Rather than entering into liquidation or other insolvency procedures that could lead to the closure of the company, a CVA gives existing directors the opportunity to restructure the business and continue trading under new terms.

The main goal is to create a voluntary agreement between the company and its unsecured creditors, allowing the business to repay outstanding debts in a more manageable way. A CVA proposal will usually outline monthly payments over a fixed period, based on projected cash flow forecasts prepared by the appointed insolvency practitioner.

CVA proposals are typically used by company directors who believe the business is fundamentally sound but has been affected by short-term financial issues, such as loss of contracts, reduced income or mounting liabilities. It can also be an option when legal action is threatened or a winding-up petition has been filed but not yet heard.

A successful CVA can help:

• Avoid compulsory liquidation or a creditors' voluntary liquidation.
• Protect the company from further legal action by creditors.
• Improve the business’s cash flow position.
• Retain control under the existing management team.
• Repay creditors over time in a way that reflects the company’s actual ability to pay.

A CVA is often seen as being in the best interests of both the company and its creditors, offering an alternative to other insolvency processes that may lead to greater losses for all parties involved.

How to Apply for a Company Voluntary Arrangement

The CVA process begins when company directors recognise that the business is unable to meet its debts but remains a viable trading entity. At this point, they appoint a licensed insolvency practitioner to review the company’s affairs and help prepare a formal CVA proposal.

Generally speaking, the CVA process will involve the following steps:

1. Appointing an insolvency practitioner: The company must engage a licensed insolvency practitioner to act as a nominee. Their role is to assess the company’s financial position, advise on the suitability of a company voluntary arrangement, and help draft a proposal that outlines how the company plans to repay its creditors.
2. Preparing the CVA proposal: The proposal includes detailed information about the company’s assets, liabilities, outstanding debts and projected cash flow forecasts. It will set out how monthly payments will be made, over what fixed period, and how the funds will be distributed among the company’s creditors. The insolvency practitioner ensures the proposal is realistic and compliant with the Insolvency Act.
3. Filing with the court and notifying creditors: Once the CVA proposal is complete, it is filed with the court, and the company’s unsecured creditors are formally notified. The company’s shareholders may also need to hold a meeting to approve the arrangement, depending on the terms of the company’s constitution.
4. Obtaining approval from creditors: A creditors' meeting is arranged, where the proposal is discussed and voted on, a process known as the creditors' vote. For the arrangement to be approved, it must gain support from creditors representing at least 75% (by debt value) of those who vote; the proposal will also be rejected if more than 50% of the total value of the unconnected creditors who vote choose to vote against it.
5. Approval and implementation: If the proposal is accepted, it becomes a legally binding agreement on all of the company’s unsecured creditors - even those who voted against it or did not vote. The insolvency practitioner then becomes the CVA supervisor, responsible for overseeing payments and ensuring the company meets its obligations under the CVA terms.

This process allows the company to continue trading under the existing directors and management team, while protecting it from enforcement action and helping to repay creditors in an organised and fair way.

What Are the Benefits of a Company Voluntary Arrangement?

A CVA offers several practical advantages for companies facing financial difficulties. When approved, it creates a structured and legally binding agreement that gives the business a route to survival while also addressing the interests of its creditors.

• Continue trading while addressing debt: A CVA allows the company to continue trading under the existing directors and management. This minimises disruption to day-to-day operations, protects employment contracts and maintains relationships with customers and suppliers. By contrast, other insolvency procedures, such as compulsory liquidation or creditors' voluntary liquidation, would result in business closure.
• Pause legal action from creditors: Once a CVA is in place, it provides protection from creditor legal action. This includes halting winding up petitions, County Court Judgments (CCJs) and bailiff enforcement, allowing the business to focus on meeting its CVA terms without the constant threat of litigation.
• Improve cash flow and reduce creditor pressure: The company voluntary arrangement restructures how outstanding debts are repaid, usually through monthly payments based on projected cash flow forecasts. This helps ease immediate cash flow issues and relieves the pressure from multiple creditors seeking payment at the same time.
• Bind all unsecured creditors to a single agreement: Once approved by 75% of voting creditors (by debt value), the CVA becomes legally binding on all unsecured creditors, even those who voted against it or abstained. This provides clarity and consistency, helping the business avoid ongoing disputes.
• Retain control and avoid administration or liquidation: Unlike administration, which hands control to an appointed administrator, or liquidation, which winds the company down, a CVA allows directors to remain in charge of the company’s affairs. This can provide continuity, maintain shareholder confidence and protect the long-term value of the business.
• Improve prospects of repaying creditors: A successful CVA increases the likelihood that creditors will recover more than they would through other insolvency processes. By allowing a viable business to recover, it can repay creditors over time rather than entering into an immediate fire sale of assets.

For companies that meet the eligibility requirements and have a strong underlying business, a CVA can offer a clear route to financial recovery with the support of a licensed insolvency practitioner and creditor approval.

What Are the Potential Downsides of a Company Voluntary Arrangement?

While a CVA can offer a lifeline to struggling businesses, it also carries potential drawbacks that company directors should consider carefully before they proceed. The CVA process requires commitment, transparency and ongoing performance against agreed terms. If the arrangement fails, the company may still face more severe insolvency procedures.

• Reputational impact and loss of confidence: Entering a CVA can signal to suppliers, lenders and customers that the company is in financial distress. Even with a successful CVA proposal, reputational damage may affect trading relationships, particularly if suppliers demand revised payment terms or withdraw credit facilities.
• Ongoing scrutiny and tight cash flow: During the CVA period, the company must meet agreed monthly payments, which may stretch already limited cash flow. Payments are monitored by the CVA supervisor, and any missed instalments could trigger enforcement or lead to failure of the arrangement. Regular reporting is expected, and any deviation from the CVA terms may affect its continuation.
• Limited access to credit: While the company may continue trading, it could find it harder to secure new finance or favourable credit terms while the CVA remains active. Lenders may be reluctant to provide funding due to the existing CVA and the company’s credit history.
• Does not bind secured or contingent creditors: A CVA primarily affects unsecured creditors. Secured creditors - those holding a legal charge over company assets - are not bound by the CVA unless they agree to its terms. This means they can still exercise their security rights outside the CVA process, such as appointing a receiver or seizing assets.
• Possibility of challenge or rejection: Creditors can reject the CVA proposal if they do not believe it reflects the best interests of the group as a whole. If enough creditors vote against it, the arrangement fails. Even after approval, creditors or shareholders may challenge the CVA if they believe it is unfairly prejudicial or if there were irregularities in the voting or preparation process.
• Cost and administrative burden: The CVA cost includes fees for the licensed insolvency practitioner acting as nominee and supervisor. These costs are usually built into the CVA payments, but they must still be factored into the company’s projected cash flow forecasts. Additional professional guidance may be required to meet the demands of the process.

If the CVA fails, the company may be exposed to further legal action, including a winding-up petition. Directors should therefore assess all other insolvency procedures and seek professional advice before proceeding with a proposed CVA.

How Can Company Voluntary Arrangements Be Challenged?

Although a CVA becomes legally binding once approved by the required creditor majority, there are specific circumstances in which it can be challenged. Challenges may be brought by creditors, shareholders or other affected parties who believe the CVA is unfair or improperly handled.

The Insolvency Act allows eligible parties to challenge a CVA on two main grounds:

• Unfair prejudice: If a creditor, shareholder or contributory believes the CVA proposal treats them less favourably than others in a way that is unjust, they may argue that their interests have been unfairly affected.
• Material irregularity: If there were procedural errors in the CVA process, such as in the creditors' meeting, voting procedure or the information provided in the CVA proposal, this may also give rise to a valid challenge.

Any challenge must usually be made within 28 days of the CVA being approved or of the party becoming aware of the approval. The court will assess whether the CVA was carried out in line with statutory requirements and whether the best interests of creditors were properly considered.

If the court finds in favour of the complainant, it can revoke or alter the CVA. This may result in the CVA being terminated and the company facing other insolvency procedures, such as administration or compulsory liquidation. Alternatively, the court may amend the CVA terms to address the unfairness or irregularity.

What Are the Potential Outcomes of a Company Voluntary Arrangement?

The outcome of a CVA depends on how well the business performs during the agreed CVA period and whether it can meet the terms set out in the proposal. While many companies use a CVA to return to financial stability, others may face challenges that affect their ability to complete the arrangement successfully.

In a positive outcome, the company completes the CVA by making all scheduled payments to creditors over the fixed period. Once the final payment is made, the company is released from any remaining unsecured debt included in the CVA. This allows it to move forward free from historic debt, often in a stronger financial position. A successful CVA can also help restore commercial relationships and improve the company’s reputation over time.

If the company struggles to meet its agreed monthly payments but is still a viable business, it may seek to vary the CVA terms. This requires the consent of creditors through another creditors' vote. Variations might include extending the CVA period, adjusting payments, or amending distribution terms. While this can offer flexibility, it may also signal to creditors that the company’s financial difficulties are ongoing.

However, if the company fails to keep up with payments or breaches other CVA terms, the arrangement may be terminated. This is typically reported by the CVA supervisor to the creditors and the court. In the event of failure, the company may face other insolvency procedures, including administration or compulsory liquidation. Creditors may also pursue legal action to recover outstanding debts, and the company’s shareholders risk losing control of the business.

Ultimately, the outcome of a company voluntary arrangement depends on the company’s ability to deliver on its objectives, which is why taking the right advice is essential when embarking on the CVA process.