Company Voluntary Arrangement
A Company Voluntary Arrangement is an Arrangement entered into between the company and its creditors. The Arrangement is governed by the ‘Proposal’ which sets out terms and details of how it will work.
The Proposal is made by the company director or where the company is in administration, by the administrator.
The Proposal can take any form subject to the agreement of creditors but normally involves the creditors agreeing to accept payment of all or part of the debt owed to them, out of future trading profits. The Arrangement normally lasts for 3-5 years. If forecast profits over the next 3-5 years are insufficient to repay creditors in full they will have to accept less than the full amount owed. The alternative will generally be liquidation which will often mean no payment to creditors.
CVA’s may also propose capital restructuring or an orderly disposal of assets within an agreed timescale.
The company remains under the control of the directors during the CVA term but the arrangement itself is overseen by a Licensed Insolvency Practitioner who acts as a ‘Supervisor’.
The CVA procedure was designed primarily as a mechanism for business rescue and is often used instead of Liquidation where there is an underlying profitable business.
Summary of CVA Procedure
| Directors, Administrator or Liquidator | The Directors, Administrator or Liquidator (as appropriate) makes a ‘Proposal’ to the creditors. The Proposal sets out the proposed terms of the Arrangement. |
| Insolvency Practitioner | An Insolvency Practitioner agrees to act on the implementation of the Proposal and then becomes known as the Nominee |
| Nominee | A Nominee will convene a Creditors Meeting giving notice to all the creditors of the Proposal and providing proxy forms for voting purposes. The nominee is generally an Insolvency Practitioner. |
| The Creditors Meeting | The Creditors Meeting is then held and the creditors may approve, reject or propose amendments to the Proposal. The creditors may also choose another Supervisor. If a majority of 75% in value of the creditor’s present and voting vote in favour, the Proposal becomes binding on all unsecured creditors, subject to connected party rules. |
| The Supervisor | Following the approval of the Voluntary Arrangement, the Nominee becomes the Supervisor and implements the Arrangement in accordance with the terms of the Proposal. |
| Secured Creditors | A CVA cannot effect the rights of a secured creditor of the company to enforce its security except with the agreement of the secured creditor |
| Challenge Period | A creditor may challenge the Arrangement within 28 days of its approval if it is of the opinion that it has been unfairly prejudiced by the Proposal or if of the opinion that there has been material misstatement, irregularity in the proposal or proceedings. |
| Sources of Dividend Funding | Normally, funds come from pledging future profits for a two/three year period or from a third-party who wishes to acquire the business |
