The term CVA stands for Company Voluntary Arrangement. Like an IVA solution which is used by individuals and some business types this kind of debt management deal allows a company to sort out its debt problems once and for all whilst still staying in business. So, will a CVA work for your business?
A CVA can be used as a viable debt management solution by businesses that meet specific criteria. This kind of solution allows a business to undertake a legally binding agreement with its creditors to repay some of its debts during the process and to write off what remains when the CVA is done. During this period the business is allowed to carry on trading. Let’s take a look at how a CVA works:
- Your business will need to retain a qualified Insolvency Practitioner (IP) to help guide you through the process. Your advisor here will help you to establish your debt situation and to assess just how profitable your business could potentially be over the next few years. This generally involves a detailed business analysis and full financial forecasts and documentation for a specific period of time. They will then be able to build a proposal for you that outlines the payments that could be made to your creditors from future profits. This is normally made on a ‘pence in the pound’, lump sum or asset liquidation basis and must be backed up by your financial forecasts. This proposal will need approval from all your Directors before you can proceed. During this period your business can continue to trade.
- Your IP next convenes a meeting of your creditors to put your proposal to them. During the meeting your creditors (both unsecured and non-associated) can vote to accept or reject your CVA. You need a vote that totals 75% of the value of your debts for both types of creditor to be able to go ahead. This meeting may also involve a shareholder vote -- you need a 50% acceptance here.
- Your IP will then formally set up your CVA and arrange to make your payments to your creditors. Your creditors and your business are then legally bound to conform to the terms of your CVA. If you fail to do so then your business could effectively be shut down.
What are the benefits to you?
A CVA can be a benefit rich solution to many businesses and can give them the breathing space and a route to effective debt management without having to close down the company. For example, a CVA can:
- Allow a potentially profitable business to carry on trading and to have the chance to turn things round over time.
- Enable you to repay some or all of your debts and have the rest written off within the CVA period (usually around 5 years).
- Put a halt to creditors taking action against your company to close it down.
- Help put your company back on a more stable financial footing.
- Allow the company to be run by the existing Directors.
Are there any drawbacks to a CVA?
Even though there are a great many advantages to taking a CVA route to save your business it is important that you look at the full picture and also consider the drawbacks. Issues that you may want to think about here include:
- You cannot include secured creditors in a CVA.
- It can sometimes be hard to get lines of credit in your sector from existing creditors.
- You are committed to your CVA and, if you default on its terms, your business could be shut down.
- Creditors may impose limits on the earnings of Directors during the course of the CVA.
Although a CVA may suit the problems of some businesses this may not be the best debt management solution for your company. In general terms a CVA may be proposed/workable if:
- Your business shows evidence that it has a good chance of thriving in the future.
- Your business is insolvent or has debts that put it in a state of contingent insolvency.
It is wise to take professional advice here before you decide the best route for your company. For a free no-obligation chat with a professional money counsellor, telephone 0800 970 4835, or complete the details on our contact us page. We can help you work out the best way of getting your business out of the red and back into the black!
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