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Company Voluntary Arrangement
If your company is struggling financially, a Company Voluntary Arrangement may be a suitable solution to ensure a business continues as a going concern. Our team can provide expert help and legal advice to management teams or insolvency practitioners who are nominated to supervise a CVA.
What is a Company Voluntary Arrangement?
A Company Voluntary Arrangement (CVA) is a formal procedure used by a company in financial distress to come to an arrangement with its creditors. It permits the company to remain in business and usually seeks to produce a higher return to creditors as a whole compared to the use of any other form of insolvency procedure.
The CVA was introduced in the Insolvency Act 1986 and is a method of achieving Parliament’s preference for a business to continue as a going concern and to save as many jobs as possible. CVAs are relatively cheap to instigate and allow directors to run and operate their business rather than an insolvency practitioner. However, despite these advantages, its use has not been as widespread as anticipated.
Perhaps one of the reasons it is not often used is due to the reasonable belief that on the announcement of CVA proposals to the creditors, they will take action to protect their own position above those of other creditors. However, the Insolvency Act 2000 introduced a new procedure to allow companies to obtain a moratorium, which prevents creditors from taking action for an initial period of 28 days while proposals are considered.
Moratorium only applies for small companies who meet two out of three of the following criteria:
- Turnover is less than £5.6 million
- The balance sheet total is less than £2.8 million
- There are fewer than 50 employees
There is no such moratorium protection for larger companies. For this reason, many larger companies are put into administration first, giving them protection from creditors and allowing them to make CVA proposals.
Although the directors may propose a CVA, an insolvency practitioner is appointed to act as both a nominee of the arrangement and a supervisor of the scheme once it has been agreed by the creditors.
The nominee is responsible for reviewing proposals and preparing a report to the court that sets out the proposals, the state of affairs of the company and whether a meeting of the company and creditors should be held.
A meeting must be held with a company’s creditors to approve proposals. A proposal must receive over 75% approval in value of the creditors present (in person and by proxy) to bind all creditors to an arrangement. This ensures creditors cannot commence action against a company to recover money owed unless the company fails to abide by the terms of the CVA.
The CVA comes to an end once it has been completed or when it fails, upon which the supervisor notifies the Registrar of Companies within 28 days.
Our team understands the serious implications of a business entering into insolvency and a company must seek legal advice as soon as possible to avoid losing a company altogether. Whether you’re a company director or an insolvency practitioner charged with overseeing a CVA, we will help you keep a business as a going concern to reduce the impact of financial distress.