Once a business starts to experience cash flow problems debts can quickly become unmanageable, even if sales are good and ‘on paper’ the business is thriving. It only takes one credit customer or supplier who doesn’t pay on time, though, and your ability to pay your own debts is restricted.

This knock-on effect within a supply chain or industry can be very damaging, and is sometimes a precursor to full insolvency. It’s also a difficult situation to manage as a director, and a problem that might only be resolved with professional help.

We’re fortunate in the UK to have various procedures available in these circumstances, and one of these is the Company Voluntary Arrangement, or CVA.

A Company Voluntary Arrangement might be a good option if your company is fundamentally healthy, so what exactly is this procedure and how could it help your small business to escape debt?

What is a Company Voluntary Arrangement?

A CVA is an officially authorised procedure that helps companies deal with debt by restructuring their repayments. It involves formal negotiations with the company’s creditors, often for a proportion of the money to be repaid at a lower monthly rate.

Given the business’ adverse circumstances this arrangement can benefit all parties. Creditors receive some of their money back as opposed to very little, or nothing at all, if the company enters liquidation.

The process enables you, as a director, to continue trading, but under new contractual terms for your debts. A CVA typically lasts between three and five years, and if you complete the process without default, any money owing at the end of the term may be written off.

Is CVA the same as administration?

Although a CVA can result from administration, it’s an insolvency process in its own right. Company administration offers a specific period of time during which a business is protected from legal action by creditors, but the appointed insolvency practitioner must plan for the future of the company during this time.

If conditions are right, therefore, a Company Voluntary Arrangement could be a good option to exit this period, but what are the requirements and might you be eligible?

Are you eligible for a CVA?

 

Eligibility criteria for a CVA include:

• Being formally insolvent
• Being deemed capable of financial recovery by a licensed insolvency practitioner (IP)
• Having cash flow that’s relatively stable – so the IP can assess the company’s ability to meet CVA repayments over the whole term

A Company Voluntary Arrangement isn’t suitable for all companies, but if you meet the requirements it offers significant benefits for the business and its creditors.

What does a CVA mean for creditors?

When a company struggles to repay its debts, it can be costly for creditors in a number of ways. They don’t receive payment, which can quickly cause serious financial problems, but they also use up valuable resources in terms of time and money in chasing payments.

This is why a CVA proposal can be welcomed by creditors. It offers them partial repayment and the opportunity to retain a working relationship with a company that may previously have had an impeccable payment record.

A key eligibility requirement is the company’s long-term viability. This assessment is made by a licensed insolvency practitioner who provides their opinion based on professional knowledge and experience.

What happens if a CVA fails?

When the insolvency practitioner calculates how much your company can repay each month, they do so with long-term affordability in mind, so you stand the best chance of completing the CVA successfully.

Circumstances can change, however, and regardless of the professional assessment of your company’s ability to repay, these arrangements sometimes fail.

This could be due to a changing market that’s affecting you and other businesses, for example, or maybe the loss of a large customer. Whatever the reason, if a CVA fails it leaves your company exposed once again to legal action by creditors.

Creditors will want to recover their money, and forcing your company into liquidation may be their only choice. If this is the case, a creditor or perhaps a group of creditors, will seek a winding-up order through the courts.

If a winding up order is granted, your business assets will be sold and the company closed down. This is the worst-case scenario, however, and if the licensed IP feels that a CVA would work, the best step may be to simply trust their professional judgement.

Advantages and disadvantages of a CVA

Advantages

• You can guide your company out of financial difficulty as a director once the CVA has been set up
• A CVA freezes additional interest and charges on your debts
• No legal action can be taken by the creditors included in the arrangement whilst the CVA is in force
• The cost of a CVA can be lower than alternative procedures, such as liquidation
• You’re not obliged to tell customers or clients that your company is in financial difficulty
• The pressure from creditors is removed, with no more demands for payment of the debts included in the CVA

Disadvantages

• 75 percent of creditors must agree the CVA proposal
• It may seem like a long time to complete the process
• Because your company has defaulted on payment to its creditors, the CVA appears on your business’ credit file – this negatively affects your chances of borrowing in the future

What happens when a CVA ends?

At the end of the CVA, any debt remaining may be written off. You receive a completion certificate, which is formal notification that the procedure has ended. A note should also be placed on the company’s credit file signifying that the CVA has come to an end with all requirements met.

The company carries on trading without the debts that were included in the CVA. You may be able to secure borrowing in the future, and should give careful consideration to rebuilding the company’s credit rating.

Carry on trading with a CVA

When a company is in serious debt, the relentless pressure from creditors can seriously hinder its ability to recover. Essentially, your time is taken up in dealing with creditor demands and threats, so you can’t move the business forward.

CVAs allow companies experiencing short-term financial difficulty to carry on trading with a view to full recovery over time. It’s this ability to recover that the IP looks for when assessing a company’s future, as the success of the entire process is reliant on being able to repay the CVA without default.

Obtaining reliable advice as soon as the company starts to decline improves its chances of recovery. If your business is struggling but you feel the problems are only temporary and could be overcome with time, consider the benefits and drawbacks of a CVA, and seek the professional insolvency help that could save your company.