Company Voluntary Arrangement (CVA)

The CVA procedure starts with the directors of the company meeting an insolvency practitioner (IP). It is preferable for the IP to meet all the directors since the directors are expected to work together, and as a team, in order to bring the company out of its financial difficulties. At the initial meeting the IP will obtain information about various aspects of the company including its assets and liabilities, the level of pressure from creditors, and expected trading results over the coming months. Unfortunately, for a variety of reasons, it is often the case that directors delay their initial approach to an IP until the state of the company has deteriorated beyond the point of no return. It is therefore important that directors take advice as soon as they are aware that the company is in financial difficulty. At the initial meeting the IP will discuss with the directors the need to prepare forecasts for cashflow and trading results. He or she will also discuss the general terms of the proposed voluntary arrangement. In the majority of cases these terms will usually be based on the company paying a fixed sum each month into a fund controlled by the IP for the benefit of the company creditors. Payments may be made for a period of up to 5 years but the period may be significantly shorter than 5 years depending on the circumstances. It is important to note that payments made under the voluntary arrangement are accepted by creditors in full and final settlement and that typically a company in a CVA will not be required to pay its debts in full.

At the initial meeting the IP will discuss with the directors other insolvency procedures, such as liquidation and administration. The main advantage of the CVA procedure which does not apply to the other procedures is that in a CVA the business of the company is continued under the day to day control of the directors. In a liquidation it is usual for the company to cease trading whilst in administration it is usual for the business to be under the day to day control of an IP until such time as the business and other assets of the company are sold.

If, after the initial meeting, the directors decide they wish to enter into a CVA then they instruct the IP to prepare a detailed document known as a proposal. The purpose of this proposal is to paint a full picture of the circumstances of the company so that the creditors of the company have all the information they can reasonably expect to enable them to decide whether they are willing to support the CVA proposal. Once the proposal document has been completed it is filed at the local county court. At that point a moratorium comes into place. This means that, subject to certain specific exceptions, creditors cannot start or continue legal proceedings against the company. The IP (who by this time is known as the nominee) then submits his or her own report to the court and to the creditors. Copies of the proposal and the nominee's report are then sent to creditors, and also to the shareholders of the company, together with notices convening meetings of the creditors and shareholders.

From the point at which notices are sent to creditors, if not before, the IP acts as a mediator in an attempt to balance the rights and duties of the company with those of its creditors. The IP is required to satisfy himself that the CVA proposal is viable and that it has a reasonable prospect of being accepted by the creditors and implemented. There is therefore something of a balancing act between on the one hand achieving the maximum return which the creditors would ideally like, and on the other hand recognising what the company is actually capable of achieving.

In the case of most small to medium companies the meeting of shareholders ought not to present any practical difficulties. In many cases the shareholders will be the same individuals as the directors who have proposed the CVA. In any event the consent of the shareholders is not strictly required for the successful implementation of a CVA. The meeting of creditors on the other hand is an important event. That meeting is conducted by the IP who has assisted the directors in preparing the CVA proposal. In practical terms it is important that at least one director is present at the creditors meeting. There are two reasons for this. Firstly, it is the directors who are going to continue to run the company on a day to day basis. Secondly, it is likely that creditors representatives will wish to put questions to the directors and propose alterations or "modifications" to the CVA proposal. If the proposal has been prepared with sufficient thought any modifications ought to be technical and minor. Nevertheless, it may be necessary for the company to agree those modifications in order to ensure that 75% by value of creditors voting at the meeting approve the CVA terms.

An important feature of the CVA procedure is that if a creditors meeting approves terms for a CVA then the approval binds all creditors of the company who have, or ought to have, been given notice of the creditors meeting. This means that so long as a 75% by value majority is obtained at the creditors meeting, subject to specific exceptions, the terms of the VA are binding on those creditors who voted for the rejection of the proposal and also those creditors who did not vote at all. In particular creditors who voted against, or did not vote at all, cannot generally commence or continue legal proceeding against the company for debts which arose prior to the commencement of the CVA.

It should be pointed out at this stage that, in any CVA, Government Departments (Inland Revenue and HM Customs & Excise) may well be creditors for significant sums of money, and hence will have a major, if not the deciding, influence on whether the proposal is accepted and, if so, the terms of acceptance. As a bare minimum, they will expect to see provisions in the proposal regulating the company's compliance with its Tax and VAT obligations following approval of the proposal.

Normally the IP who has helped the directors prepare the CVA proposal, i.e. the nominee, also supervises the voluntary arrangement after it has been approved. For this reason the IP is known as "the supervisor" after the date of the creditors and shareholders meetings. It is the supervisor's duty to ensure that the company makes its payments into the CVA fund in accordance with the terms of the proposal, subject to any modifications agreed at the creditors meeting. Usually the supervisor will be required to monitor the management accounts of the company on a regular basis. The supervisor and creditors will wish to be satisfied that the company is not incurring new debt which it cannot pay in the normal course of trade. It is therefore important to recognise that the creditors approval of a CVA is by no means the end of the process. In a sense it is the beginning of the process or at least a new start so far as the company is concerned. It is likely that the supervisor and the directors will have regular meetings in order to consider the continuing trading results of the company. The trading and cashflow forecasts which were prepared prior to the creditors meeting should have been prepared carefully and on a prudent basis. If nevertheless the company has difficulty in meeting its obligations under the CVA then it is possible to go back to the creditors for a variation of the CVA terms. As with the original terms a variation is effective only if it is agreed by 75% by value of creditors voting at a meeting specifically convened to consider the variation.

Clearly the CVA procedure is not a solution for all companies in financial difficulties. For example those difficulties may arise out of a long term decline in the customer base or continuing competition which results in unacceptably low gross profit margins. Even if a company agrees CVA terms with its creditors it may prove unable to achieve the plan set out in the CVA proposal and despite the best efforts of the directors it may prove necessary for the company to be placed into liquidation. Nevertheless, if the directors have not allowed the financial health of the company to deteriorate too far before seeking financial advice and if there is a sound underlying business the CVA route is one which may usefully be followed for the benefit of the company, and its creditors, directors and shareholders.