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Navigating the complexities of business finances can be challenging for any company owner. Financial difficulties, however, do not necessarily spell the end for a struggling business. In the UK, a Company Voluntary Arrangement (CVA) can offer a viable solution to keep a company afloat while addressing its financial obligations. This article explores the intricacies of CVAs to help UK business owners understand this valuable tool.
What is a Company Voluntary Arrangement (CVA)?
A Company Voluntary Arrangement (CVA) is a legally binding agreement between a company and its creditors. It allows a company facing financial difficulties to reach a compromise on its debts, typically involving reduced payments over a fixed period, while enabling the business to continue trading.
The arrangement is governed by the Insolvency Act 1986, with significant involvement from an Insolvency Practitioner (IP) who acts as the supervisor of the CVA.
Key Features of a CVA
Some key features of a Company Voluntary Arrangement can include the following:
- Debt Restructuring – A CVA allows for the restructuring of company debts, providing more management repayment terms;
- Business Continuity – Unlike other insolvency procedures, a CVA enables the company to continue trading;
- Creditor Approval – To implement a CVA, 75% (by value) of the creditors who vote on the proposal must approve it; and
- Legally Binding – Once approved, the CVA is binding on all creditors entitled to vote, including those who voted against it or did not vote at all.
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The CVA Process
The CVA involves several critical steps, each requiring careful planning and legal compliance.
Let us explore the typical stages below:
1. Initial Assessment and Proposal Preparation
The process begins with the company’s directors acknowledging the financial difficulties and considering a CVA as a potential solution. They must then appoint an insolvency practitioner to thoroughly assess the company’s economic situation.
The IP will help prepare the CVA proposal, which outlines:
- the company’s financial position;
- the causes of financial difficulty;
- the proposed repayment plan and its duration; and
- the impact on creditors and stakeholders.
2. Submission to Creditors and the Court
Once the proposal is prepared, it is submitted to the company’s creditors and filed in court.
The court will set a date for a creditors’ meeting, typically within 28 days. During this period, the company continues to trade as usual, protected from legal actions by creditors under a moratorium if applicable.
3. Creditors’ Meeting and Voting
The creditors’ meeting is a crucial juncture in the CVA process. Creditors vote on the proposal, and for it to be approved, at least 75% (by value) of the creditors who vote must be in favour.
Additionally, over 50% of unconnected creditors must approve the CVA. This dual threshold ensures that the CVA is fair and equitable.
4. Implementation and Supervision
Upon approval, the CVA is implemented, and the Insolvency Practitioner becomes a supervisor, ensuring that the company adheres to the terms of the agreement.
The company makes regular payments to the IP, who distributes them to the creditors as agreed. Regular reviews are conducted to monitor compliance and financial performance.
Legal Considerations and Implications
Understanding the legal landscape surrounding CVAs is essential for business owners.
Let us explore some critical aspects that warrant attention below:
1. Directors’ Duties and Responsibilities
During the CVA process, company directors must adhere to their fiduciary duties and act in the best interests of creditors. They must also provide accurate and comprehensive financial information and cooperate fully with the insolvency practitioner.
2. Impact on Creditors
Creditors play a vital role in the CVA process. While the arrangements aim to benefit the company by relieving debt pressures, creditors must evaluate the proposal’s impact on their interests.
Depending on the proposal, secured creditors who have collateral against their loans may have their rights unaffected or partly compromised. On the other hand, unsecured creditors stand to gain more from the restructuring but may receive only a portion of the debt.
3. Employee Rights
A CVA can impact staff, particularly in terms of job security and changes in terms and conditions of employment. However, employment law offers protections, ensuring fair treatment of employees.
Redundancies, if necessary, must follow proper legal procedures, including consultation and redundancy payments.
When you incorporate a company in England and Wales, you must maintain a number of company registers at its registered office or at the Companies House. This template includes these company registers.
4. Tax Implications
The implementation of a CVA can have tax consequences. For instance, any debt forgiveness may be considered taxable income.
5. Termination and Failure of a CVA
A CVA can be terminated if the company fails to adhere to the agreed terms. In such cases, creditors may petition for the company to be wound up, leading to liquidation.
Therefore, the company must maintain regular communication with the IP and address any issues promptly to avoid termination.
Key Takeaways
A Company Voluntary Arrangement (CVA) can be a lifeline for UK businesses facing financial distress. Restructuring debts and allowing continued trading provides a pathway to recovery while balancing the interests of creditors and stakeholders.
However, the CVA process requires careful planning, legal compliance, and strategic execution. To successfully navigate this challenging landscape, business owners must understand their duties, engage professional advisors, and maintain transparent communication.
If you need legal assistance understanding company voluntary arrangements, our experienced corporation lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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