Historically, companies have often entered into liquidation far too quickly without considering the alternative methods available. One alternative to liquidation available to corporate entities is to propose a Company Voluntary Arrangement (“CVA”) to its creditors.
A CVA is a written agreement dealing with the financial affairs of the company, which binds all the relevant parties (usually the company and all its creditors), provided the statutory procedures are followed. A CVA will usually request that the company’s creditors either; (1) wait for a defined period until payment is made, (2) accept part payment of the debt, or a combination of the two. Once the company finalises its CVA the Directors will then make their written proposals to the company’s creditors.
Once the written proposals have been served on the creditors the company is able to apply for a moratorium, which effectively debars actions being brought against the company. This can be of particular use to companies under significant pressure by its creditors as it can give them up to 28 days to resolve their financial position.
The CVA proposal is then voted upon at a creditors meeting. Approval of a CVA requires a majority of over 75% (by value) of the creditors attending the creditors meeting to vote in favour of it. A CVA comes into force from the date the company’s creditors approve its CVA proposal and binds all unsecured creditors even if they did not vote at the creditors meeting.
A CVA can be effective in many cases and can help secure the company’s continued existence. Although creditors often receive much less than they are due and usually over a much longer period, it is usually better than the outcome which the creditor would face if the company went into liquidation.
Frequently Asked Questions
1. In short, what is a CVA?
Essentially it is a deal brokered between the company and its creditors.
2. Does this just mean that the company is inevitably going into liquidation or administration?
If the proposed CVA is approved, then unless the company defaults on the terms of the CVA it should avoid liquidation or administration.
3. Why would a creditor accept a CVA?
Creditors are unlikely to be paid in full but they are still likely to be paid more than they would be if the company went into liquidation. Part of the reason for this is because a CVA requires little court involvement and is significantly less expensive than administration or liquidation.
4. What are the main advantages of a CVA?
The main advantage of a CVA is the moratorium which can be applied for by the company which gives the Directors of the company ‘breathing space’ from the creditors. Furthermore, it gives the Directors an opportunity to stay in control of the company and safeguards the directors from the rigorous investigations involved with liquidation.
Blacks Solicitors LLP has a specialist financial and insolvency department dealing with all aspects of personal and corporate insolvency and can advise on the most appropriate options available to companies in financial difficulties.