What is a company voluntary arrangement?
If your company is insolvent then under the UK insolvency law, you can enter into a company voluntary arrangement (also known as a CVA). A company voluntary arrangement is a legally binding agreement between an insolvent company and its creditors. The CVA allows the insolvent company to repay all or a certain amount of their debt over a period of time, usually 1 to 5 years.
Making a deal with your creditors, through a legally binding agreement, is an alternative to having your business going into liquidation or administration. You can make an application for a CVA if you are a director of the company, the legal administrators of the company or the company liquidator.
If you manage to make an agreement with your creditors, the creditors will then be prevented from taking any enforcement action against your company.
How do you determine whether you might need one?
To determine whether you need a company voluntary arrangement, you need to assess the current state of your business and see if it is at risk of insolvency or is insolvent. If your company is insolvent or at risk then it means you should apply for a company voluntary agreement.
One of the biggest tell-tale signs that you need a CVA is if you cannot pay your debts and taxes. When insolvency is looming, act quickly and speak to your creditors regarding a CVA. When trying to understand the financial state of your business, gather as many records from the banks, HMRC, creditors and debtors.
What is insolvency?
Insolvency can be defined as being unable to pay back your debts on time. People who fall into a state of insolvency can be described as insolvent. Insolvency can fall into two categories: cash-flow insolvency and balance-sheet insolvency.
Cash-flow insolvency happens when either a person or company can afford to pay back what is owed through assets (e.g. a house) but does not have enough liquid assets to pay the debt. Balance-sheet insolvency, on the other hand, is when either a person or company doesn’t have enough assets to pay off all of the debts they have.
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How is insolvency calculated?
Insolvency may be calculated through something called a liquidity ratio. A liquidity ratio is determined by dividing the total amount of liquid assets by the amount of short term borrowing.
This ratio will then show whether the company has the ability to meet it’s debt obligations without raising capital externally. If you aren’t familiar with liquidity, it is the ability to quickly and cheaply convert assets into cash.
How long is the CVA in effect for?
When it comes to implementing a CVA, the length of time it takes may vary depending on the type of company and its creditors. Usually, it will take 4 to 10 weeks to fully enter and implement a CVA.
On average, CVA’s tend to last around two to five years, however, your CVA length will be dependant on your business's financial situation and if it can successfully pay back your creditors.
How do you propose a CVA?
A CVA will usually be proposed by the directors of your company. Alternatively, if your business is in administration or liquidation then the administrator or liquidator can also propose the CVA.
It is important to note: a CVA may only be proposed if your company is insolvent. When putting together a proposal for a CVA, it is crucial to appoint advisors e.g. insolvency practitioners to help the process run smoothly.
Advantages and disadvantages of a CVA
As with most things in life, company voluntary arrangements have both their advantages and disadvantages. Below, we will weigh up whether CVA’s are the right option for your business.
Advantages
Unlike a winding-up order, when a CVA is put in place the directors of the company will still remain in control. This is highly advantageous as the directors are the ones who know the business best. Working with professionals in insolvency will allow the directors to reach a better solution for their business advice while still remaining in control.
Another major advantage of a CVA is that they are much more cost-effective than other insolvency practices. The major costs are deducted from the agreed monthly repayments. A benefit of this is that the monthly repayment of the CVA has a better impact on the cash flow of your business.
Finally, creditors will not be allowed to demand more payments from you once they have accepted the terms for the CVA. This will give you peace of mind that, when accepted, the debt amount you have agreed to pay back will stay the same.
Disadvantages
Although there are many advantages to CVA’s, there are some things you should bear in mind before you take any action. If you do choose to do a CVA, you will need to make sure you keep up with repayments as if the agreement is broken then the creditors can take legal action against your company.
To combat this, ensure that the agreement is feasible for your business so that you don’t have any issues with repayments down the line. Another factor to bear in mind is that the CVA will affect the credit rating of your company. Thus, having a negative effect on your companies future cash flow.
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