A CVA is an insolvency procedure allows a financially troubled company to reach a binding agreement with its creditors about payment of all, or part of, its debts over an agreed period of time.

A CVA can be proposed by the directors of the company, the administrators of the company, or the liquidator of the company.

Before the CVA proposal is made, an application can be made to court for a moratorium which prevents creditors from taking action against the company or its property for up to 28 days, although if an administrator is in office the company will already be covered by the moratorium arising from the administration. In practice now and with the advent of an easily obtainable administration order, the moratorium has fallen into only occasional use.

A CVA cannot be proposed by creditors or shareholders.

When a Company Voluntary Arrangement has been proposed, a nominee (who must be an insolvency practitioner) reports to court on whether a meeting of creditors and shareholders should be held to consider the proposal.

The meeting decides whether to approve the CVA. If 75% of the creditors agree to the proposal, it is then binding and all creditors who had notice of the meeting and were entitled to vote. All creditors who had notice of the meeting are bound by the terms of the arrangement.

If the meeting of creditors and shareholders approves the CVA, the nominee (or another insolvency practitioner), becomes the supervisor of the Company Voluntary Arrangement.

Once the CVA has been carried out, the company's liability to its creditors (who had notice of the meeting of creditors) is cleared. The company can continue trading during the Arrangement and afterwards. A CVA can be proposed when a company is in liquidation or in an administration, as well as at any other time.

Those for whom a CVA may be appropriate.

1. Businesses that have a good business model with a full order book but also have cash flow problems.

2. Businesses that need to restructure.

3. Companies that have experienced trading difficulties since start up and need time to improve their business model.

4. A company that wants to avoid the stigma of liquidation.

5. A company that knows it can be profitable and successful in due course but requires time to allow its plans to mature.

6. Businesses that have close ties with their suppliers and do not want to see them lose what they are owed.

7. Where the Directors need some time to put together a new business plan for the company.

8. Businesses that will be profitable in the short term but are under pressure from creditors

9. A Company that is profitable but have encountered bad debts or late payers which has affected the financial profitability of the company.

10. A company that wishes to wind down trading in an orderly fashion

11. A business that wants to close down over a certain time.

The Company Voluntary Arrangement Procedure.

A Company Voluntary Arrangement proposal is drafted by the directors with the assistance of a Licensed Insolvency Practitioner known as the Nominee.

The proposals are then sent to the following stakeholders giving them 14 days notice of the CVA creditors meeting:-

- The Court

- The company Creditors

- The company shareholders

At the CVA meeting 75% in value of those creditors entitled to and who vote either in person or by proxy at the meeting must approve the Company Voluntary Arrangement.

The approved arrangement binds every person who in accordance with the rules had notice of, and was entitled to vote at, that meeting (whether or not he was present or represented at the meeting) as if he were a party to the Company Voluntary Arrangement.

What makes a successful Company Voluntary Arrangement.

1. The creditors must support the rescue process. It is therefore advantageous for the company directors to canvass support of the creditors in advance of the Company Voluntary Arrangement

2. The company directors must be honesty about the company's affairs.

3. A Company Voluntary Arrangement must offer the creditors more money than would be received if the company went into liquidation.

4. The business must be viable for a CVA to work.

5. The company directors must be hard working and determined for the company to succeed.

6. The company directors must show the true financial position of the company.

7. The company must have sufficient working capital to trade and pay day to day expenses.

8. The company should have a full order book or some business in the pipeline.

Advantages of Company Voluntary Arrangement.

A CVA provides the company directors with more time so preventing the creditors from taking enforcement action via the court system.

It allows structured payment of crown tax arrears.

It is a cost effective method for avoiding outright insolvency for a company with financial problems.

It is a flexible way of dealing with a company's debt problems because the proposal can be co-produced by the company directors.

A Company Voluntary Arrangement is legally binding.

The CVA allows the business to trade on and so this provides the company directors with continued income.

It provides the company with breathing space so the company can facilitate the rescue procedure.

It further allows the director's time to re-organise and restructure the company without the threat of creditor action.

It costs less that other more serious insolvency procedures such as receivership or administration.

The CVA is a matter between creditors and the company and so it will not appear in the papers thereby avoiding negative publicity.

The government, banks and large creditors are keen on promoting the "rescue culture" and so they are generally prepared to work with troubled businesses to save them.

The Company Voluntary Arrangement avoids the need for the Licensed Insolvency Practitioner investigate the affairs of the company unlike liquidation.

A Company Voluntary Arrangement avoids the need for the Licensed Insolvency Practitioner to report on the conduct of the directors to the submit a report to the Directors Disqualification Unit of the Department for Business, Enterprise & Regulatory Reform (BERR).

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