About CVAs and their purpose
A CVA is used when the company is profitable and is believed to have the ability to trade profitably going forward but has historic debt and pressures from creditors holding it back. This includes HM Revenue and Custom debt, which may have built up.
This arrangement was introduced in 1986 and is a legally binding Government legislated company rescue route.
The company in a CVA will typically pay an amount of money that it can afford to pay from future trading against those debts and the remaining debt at the end of a successful CVA will be written off.
It can be used as a procedure to terminate any onerous contracts such as leases or hire purchase agreements.
Creditors at the time of the CVA (which include HM Revenue and Customs), will be bound to the arrangement and they are unable to take legal action against the company for this debt.
It can be used to avoid or deal with statutory demands and other actions.
It is a particularly helpful too when a company needs to be re-structured in order to survive or to allow for planned changes in a company to take effect.
What is the procedure?
A CVA proposal will be drawn up and provided to all the creditors in that proposal for their consideration. An Insolvency Practitioner will be appointed Nominee at that point.
The proposal will include:
- Financial figures, both historic and forecast
- Detail of the company’s assets and an estimation of their value
- Details of any assets which are to be excluded from the arrangement
- Details of how different classes of creditors are dealt with, such as the landlord
- A proposed payment plan (usually a monthly amount from the company’s future profits)
- History of the company and reasons why the directors believe they can now trade profitably
- How much money the creditors will expect to get and the timings of the distributions
A virtual meeting will be summoned (at least 14 days after the proposal has been sent) to consider the CVA. A vote will be counted and if 75% or more of those creditors who were voting at that meeting accept the CVA, then all creditors in the CVA are bound by the decision.
If the CVA is accepted
If the CVA is accepted, an Insolvency Practitioner will be appointed as Supervisor
The company will continue trading as it did before but will not have that debt to pay as they will be paid through the arrangement. The company will be obliged to pay an amount to the Supervisor (usually monthly) and the Supervisor will build these funds up and use them for their reasonable fees (which the creditors will set) and share these monies fairly between creditors (a dividend).
It is the directors’ who continue to run the company and the Supervisor just ensures that the agreement between the company and its creditors is adhered to.
When the arrangement has been completed a Certificate of Due Completion is sent to the company and all creditors. At this point a final dividend will be paid. A Certificate of Due Completion is proof that the company has completed the agreement satisfactorily and the creditors at this point will write off the remaining of the CVA debt. If they received a dividend of 40p in the £, they will write off 60% of their original debt.
Why would creditors do this, you may ask?
In the time that the company has been subject to a CVA, they have benefited from continued trade for the duration of the CVA and for the future. They will also have received more money back from the CVA than they would have if the company had closed.