CVA stands for Company Voluntary Arrangement and provides a way for an insolvent company to continue trading while it attempts to turn its business around. Essentially, new arrangements are made with the company's creditors, allowing the company to repay a portion of the debt over an agreed timescale.
How does a company get a CVA?
In order to successfully apply for a CVA, a company must be insolvent but still viable. A company or limited liability partnership (LLP) can only apply if all the directors or members agree.
Additionally, a proposed CVA must be agreed to by creditors who are owed 75% or more of the company's total debt. Creditors will be contacted and invited to vote on the proposal. In practise, creditors will generally agree to a CVA if it can be shown that they are likely to get back more of the money they are owed than they would if the company were liquidated and its assets sold off. A Company Voluntary Arrangement or a CVA to use the abbreviation must be obtained through an authorised insolvency practitioner.
How does it work?
The new agreements with creditors will become legally binding and replace any previous agreements or contracts. While the CVA is in place, and the company is meeting its obligations under the agreement, a ringfence or ‘moratorium' is placed around the company. This prevents creditors from taking further action. If the company fails to make repayments agreed to within the CVA arrangement however, any creditor can apply to wind up the business.
CVAs can be quite flexible and the payment schedule can be arranged over a period of up to five years. A company may, for example, come to an arrangement to pay a total of 70p from every £1 owed in monthly payments spread over three years.
What are the benefits?
There are a number of benefits to entering into a CVA. These include:
- The opportunity to turn the business round and make it viable again.
- The increased ‘breathing space' provided by a moratorium. The company is in essence protected against the threat of legal action as long as they stick to the schedule of a CVA.
- Structured repayments can be planned for and may help with short-term cashflow problems.
- The board and shareholders will usually retain control of the company.
- For creditors, they may be able to recover more of the money owed than if the company went into liquidation.
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