A CVA is primarily used to rescue a company, avoid Insolvency proceedings and the cessation of trading and will release a company from all its unsecured debts. Alternatively, it can provide protection for a company in temporary difficulties, often in combination with the Administration process. If a company is unable to pay its debts in full, then it can propose a CVA to its unsecured creditors. A CVA is an agreement for the company to pay a sum of money into a single arrangement for the benefit of unsecured creditors, i.e. those who do not hold security over any assets. This could result in a high percentage of these debts being written off by the creditors. Once a CVA has been approved, no unsecured creditor can take any further action to recover their money, outside of what has been agreed in the CVA. Protection against enforcement action by creditors can also be obtained whilst the proposal to creditors is being prepared. A typical CVA will include an offer to make a monthly payment from the company’s profits. If 75% in value of unsecured creditors who vote at the decision procedure (usually a virtual meeting by telephone or other electronic communication) to approve a CVA proposal to, agree to the CVA then all creditors, even those voting against the proposal are bound by the arrangement. An Insolvency Practitioner (IP), who is regulated and holds a license from their governing body, must agree that the CVA is fair to both the company proposing the CVA and its creditors. The IP will become the supervisor of the CVA on its approval and will be responsible for ensuring that it is implemented as agreed.

Typical companies entering into a CVA include:

  • Companies experiencing cash flow problems and are under creditor pressure, but where the directors anticipate that profits will increased in future, or that a major contract will be secured;
  • Companies that have been profitable, but have suffered bad debts, adversely affecting its short term financial position;
  • Companies needing to restructure to return to profitability, but lacking the finance to do so. A CVA may be part of a wider restructuring policy;
  • Companies that are unprofitable but where a CVA would provide a better return to creditors than alternative Insolvency proceedings, such as a formal Winding-Up;

In a CVA the directors retain control of the company, and there are fewer reputational consequences than in Administration or Liquidation, both of which trigger reporting requirements under the Company Directors Disqualification Act 1986. For small owner managed, or family companies, the retention of control is a major consideration. The reputation of the company is also protected as opposed to other Insolvency proceedings, as there is no requirement to advertise that the company is in a CVA, either on letterheads or in newspapers.

For a detailed analysis of the company’s financial affairs and to discuss its options in detail, please call John Paylor on 020 3096 0750. Alternatively ask the company’s professional advisors to contact us to discuss the options available.

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Guardian Business Recovery
72 Temple Chambers
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London, EC4Y 0HP
Tel : +44 (0)20 3096 0750
Fax : +44 (0)20 7583 1200

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John Paylor is licensed as an insolvency practitioner in the UK by the Institute of Chartered Accountants in England and Wales

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