INSOLVENCY & LAW
Creditor’s Guide to Company Voluntary Arrangement (CVA)
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We help creditors achieve a greater return from Company Voluntary Arrangements (CVAs).
A Company Voluntary Arrangement (CVA) is a formal contract between an insolvent company and its creditors. By arranging a repayment plan over 3 to 5 years, they enable a company to maintain its trading operations while satisfying its creditors.
Benefits of a Company Voluntary Arrangement
Creditors often inquire about the option of placing the company into liquidation and selling the assets to repay them. However, this is never the case since creditors in liquidation always receive less money compared to those involved in a Company Voluntary Arrangement.
Moreover, in liquidation, there is no opportunity to generate income from future business. On the contrary, if the company is doing well and experiencing great profits three years into a CVA, the facilitating insolvency practitioner can enhance the amount that creditors receive in their monthly payments.
What is the process for approving a CVA proposal?
To approve a Company Voluntary Arrangement, a group of creditors owed at least 75% of the debt must vote in favor of the proposal.
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How Does a Company Enter a CVA?
The process begins when a company director seeks out and hires an insolvency practitioner, known as a nominee, to put together a Company Voluntary Arrangement proposal. The proposal takes 2 to 4 weeks to prepare, and normally includes:
- Financial data
- A summary of the company trading history
- Information about the directors, creditors, shareholders and employees
- 3 to 5 year restructuring projections explaining how the business will become profitable and pay monthly into the CVA.
If the company falls into arrears on its contributions to creditors for more than 2 months, the Company Voluntary Arrangement will be considered a failure. As a result, the insolvency practitioner, who assumes the role of a 'supervisor' once the proposal is accepted, will be obligated to liquidate the company.
Connected Creditors
To consider a proposal successful, the remaining creditors must support it with a majority of 50%, excluding friends and relatives of the directors who have lent money to the company (referred to as connected creditors).
Liquidation is very serious and you will need expert guidance and support. I&L helps directors to wind up companies. Call 020 7504 1300 now for free and confidential advice…
How to Block a CVA
To approve the proposal, creditors must vote in favor, with a requirement of 75% support. Consequently, a coalition consisting of at least 26% of the creditors is necessary either to block the Company Voluntary Arrangement or to make amendments to the proposal.
Creditor Tips
Creditors effectively pay for the insolvency practitioner’s fees because the money used to remunerate nominees and supervisors would otherwise be redistributed to them. Most forget how an insolvency practitioner's fees can spiral over time. To avoid this happening, creditors should never automatically accept the director’s choice of nominee or their CVA proposal.
Why not? Because it's almost impossible for an insolvency practitioner to prioritise creditors' interests over of those of the director who chose them. Also, it's key that creditors insist on making changes to the Company Voluntary Arrangement proposal. The 1st change they make should be to appoint their own insolvency practitioner / supervisor.
Replacing the Nominee
Too few creditors are aware of their rights or realise how much power they hold. Before the proposal is approved, creditors have the authority to remove the nominee and appoint their own insolvency practitioner. But only if they are:
- Dissatisfied with the supervisor
- Uncomfortable with the supervisor's relationship with the company director.
In most instances, creditors' interests are best served after they’ve replaced the insolvency practitioner chosen by the company director. Creditors have even greater leverage when they come together and communicate in the weeks, days, and hours leading up to the confirmation of the proposal.
Discuss your situation in confidence
Financial distress is rarely straightforward, and delay often increases risk.
If you are a creditor, investor, or director affected by insolvency, speaking to an experienced insolvency expert can help clarify where you stand and what may follow.
Contact our team at Insolvency & Law to book a confidential consultation now