How does a Company Voluntary Arrangement (CVA) work?
A Company Voluntary Arrangement is a formal insolvency procedure for companies that are already insolvent or at risk of insolvency. Your company is technically insolvent if it:
- Cannot pay its debts when they become due (cash flow insolvency); or
- The value of liabilities exceeds its total assets on the balance sheet (balance sheet insolvency).
In practical terms, if you have creditors that are threatening you with legal action over a debt you cannot pay, or you’re regularly struggling to meet payroll, rent or other essential overheads, your business is likely to be insolvent.
If your business is in this position but has a realistic prospect of recovery, a CVA may be an appropriate solution. The first step is to contact a licensed Insolvency Practitioner. They will assess the business and determine whether you are a good candidate for a CVA.
If you are, they will help you draw up affordable repayment proposals for your creditors. Your creditors will then vote on whether to accept your proposal.
- If at least 75% (by debt value) of creditors accept your proposal, the CVA will become legally binding, and you will make a single regular payment towards your debts over an agreed period, typically between three and five years.
- If your creditors reject your proposal, you can revise it, usually by increasing the monthly repayment or the CVA’s term, or consider other company rescue options or insolvency procedures.
How long does a Company Voluntary Arrangement (CVA) last?
Most CVA’s typically last between three and five years, although the term can be shorter or longer depending on the size of the debt, how much you can afford to pay and the agreement you have with your creditors.
During that time, you make regular payments towards your debts from the income you generate while you continue to trade. Most CVA payments are monthly, but they can also be quarterly or seasonal depending on your business.
You will also have to settle all your new liabilities, such as rent, wages and supplier invoices, as they become due. If you miss CVA contributions or fail to keep up with your ongoing liabilities, you could be in breach of the CVA, which may lead to the cancellation of the arrangement.
While the Company Voluntary Arrangement is in place, you will usually be required to inform the Insolvency Practitioner of any significant changes to your financial position. For example, if you sell company assets or experience an upturn in your trading performance. You may also be subject to restrictions on taking on new credit and require approval if you want to borrow above certain limits.
If you make all the scheduled payments, the CVA will end and any outstanding debt included in the arrangement will usually be written off, allowing you and the company to move forward on a more stable financial footing.
Which creditors can you include in a Company Voluntary Arrangement (CVA)?
A Company Voluntary Arrangement (CVA) mainly covers your unsecured creditors. That’s those that do not hold security over company assets, including:
- HMRC for certain tax debts
- Trade suppliers
- Landlords for rent arrears, lease termination costs and other overdue payments
- Unsecured lending, including overdrafts and credit cards
- Money owed to connected parties, such as business partners or associate companies
Crucially, a CVA covers all unsecured creditors, even those who vote against it. If creditors representing at least 75% of the total unsecured debt (by value) approve the proposal, it becomes legally binding on all of them.
Secured debts, such as mortgages or loans made against company assets, are not usually included in a CVA. You will still need to repay these debts separately or your creditors may be able to enforce their security and seize company assets.
What is the Company Voluntary Arrangement (CVA) timeline?
A Company Voluntary Arrangement is a two-stage process: the proposal and approval process, followed by the repayment period. This quick CVA timeline gives you an idea of how long each step takes.
Initial assessment (one to three weeks)
The first step is to contact a licensed Insolvency Practitioner (IP). They will assess the company’s financial position, including its debts, cash flow and future viability, and determine whether a CVA is suitable.
Drafting the proposal (three to nine weeks)
If the IP decides you can proceed with a CVA, they will begin preparing the proposal to send to your creditors. That will include key details like:
- How much of the outstanding debt you will repay
- The length of the arrangement
- The monthly contribution you will make and how the IP will distribute it among the creditors
The proposal will also provide a background to the business, an explanation of what led to its financial issues and details of how it aims to return to profitability.
Creditor notification and decision (nine to 12 weeks)
The IP sends the CVA proposal to creditors and gives them at least 14 days’ notice of the decision procedure. The creditors then vote on the proposal. If those accounting for 75% or more of the company’s unsecured debt approve it, the CVA becomes legally binding on all unsecured creditors.
Implementation (three to five years)
If the creditors approve the CVA, the IP will implement the arrangement. The company will make a regular payment to the IP, who will distribute it among the creditors according to the breakdown in the proposal.
The company will continue trading and the IP will monitor its performance. They will also produce regular reports for the creditors with updates on payments, the company’s financial position and the overall progress of the arrangement.
Completion (end of CVA’s term)
Once you’ve made all the payments, the company will exit the CVA and any outstanding debt amounts will usually be written off. The IP will issue a completion certificate confirming that the company has fulfilled all its obligations. They will also prepare a final report for the creditors and send a notice of completion to the creditors and Companies House.
What part does a licensed Insolvency Practitioner play in a Company Voluntary Arrangement (CVA)?
A Company Voluntary Arrangement must be administered by a licensed Insolvency Practitioner, who will act as the Nominee and Supervisor.
- Nominee - In their role as the Nominee, the Insolvency Practitioner will assess whether a CVA is suitable for the company, review its financial position and help to prepare a fair and affordable proposal. They will then submit the proposal to the creditors and arrange a decision procedure to vote on the CVA.
- Supervisor - If the creditors approve the CVA, the Insolvency Practitioner's role switches from Nominee to Supervisor. As the Supervisor, they are responsible for collecting the monthly payments from the company and distributing the funds to the creditors.
The IP will also monitor the company’s compliance throughout the CVA, provide regular updates to creditors and take action if the company fails to meet its obligations.
How much does a Company Voluntary Arrangement (CVA) cost?
In most cases, Company Voluntary Arrangement (CVA) fees are structured so you do not need to make a large, upfront payment. Instead, costs are typically built into the repayment plan and funded through the company’s ongoing contributions. That can make a CVA accessible even when cash flow is under pressure.
There are two main fee elements in a CVA: one for the initial setup of the arrangement and one for its ongoing supervision and management.
Nominee’s fee
The first fee covers the Insolvency Practitioner’s work in assessing the company’s financial position, advising on the suitability of a CVA and preparing the proposal for creditors.
This fee is often incorporated into the CVA and recovered through the company’s monthly contributions once the arrangement is approved. In some cases, depending on the practitioner and the circumstances, you may be asked to make an upfront contribution.
Nominee fees typically range from £2,500 to £10,000, depending on the size of the company and the number of creditors involved.
Supervisor’s fee
Once the CVA is in place, the IP acts as the Supervisor and charges a fee for administering and monitoring the arrangement.
This fee is usually a percentage, typically between 10 and 15%, of the regular CVA payments. Over the term of the CVA, the total Supervisor’s fee usually ranges from £10,000 to £30,000, depending on the length and complexity of the agreement.
What happens if I miss a Company Voluntary Arrangement (CVA) payment?
A Company Voluntary Arrangement is a legally binding agreement, and missing payments technically constitutes a breach of its terms. In serious or repeated cases, it can lead to the CVA failing, at which point creditors may take action, potentially leading to the Compulsory Liquidation of your company.
In practice, however, a single missed or late payment will not automatically result in the termination of a CVA. Most CVAs allow for some flexibility, and the Supervisor often has the discretion to make short-term adjustments depending on the circumstances.
If you are aware that you will not be able to make a CVA payment, you should contact the Supervisor immediately. They may be able to:
- Arrange a payment holiday - The IP may agree to a short pause in payments to help you overcome a temporary cash flow shortfall.
- Reschedule the payments - Adjusting the timing or amount of the monthly payments may help you get back on track without breaching the CVA.
- Amend the CVA proposal - If the monthly payments are no longer affordable, the IP may be able to renegotiate the arrangement with the creditors, but only if the company remains viable.
- Explore other options - If a CVA is no longer suitable, the IP can advise on alternative solutions, such as refinancing, restructuring or Administration. If the company no longer has a realistic prospect of recovery, closing it voluntarily via a procedure called a Creditors’ Voluntary Liquidation (CVL) may be the best option.
What are the advantages and disadvantages of a Company Voluntary Arrangement (CVA)?
A CVA is a powerful company rescue tool that allows your business to keep trading while it repays its debts. However, as a formal insolvency procedure, there are also some important obligations and potential drawbacks to consider before entering into an arrangement.
What are the advantages of a CVA?
- The company continues trading - The directors remain in control and keep trading the company while it repays its unsecured debts over time. That helps to preserve revenue, jobs and customer relationships.
- There’s protection from legal action - Once approved, creditors included in the CVA cannot take or continue legal action against the company to recover debts. That can prevent enforcement action such as County Court Judgments (CCJs), visits from bailiffs and Winding Up Petitions.
- The payments are affordable - The regular CVA payments must be affordable. In some cases, the payment amount can also be adjusted if the business’s circumstances change.
- Some debt may be written off - Any unsecured debt included in the CVA that is not fully repaid by the end of the arrangement is typically written off.
What are the disadvantages of a CVA?
- It damages your credit rating - A CVA stays on your company’s credit record for six years and may affect your ability to trade with new suppliers or obtain new credit or funding at competitive rates.
- You need creditor approval - Your ability to enter into a CVA relies on the support of your creditors. That may not be forthcoming if they lack confidence in your recovery plan or feel the repayment terms are unrealistic.
- It’s a long-term commitment - CVAs usually last three to five years and require sustained financial discipline over an extended period. The arrangement could fail if the business experiences trading difficulties or misses payments during this time.
- Your supplier relationships may be affected - Existing suppliers may choose not to work with you if they feel the risk is too high, or they may reduce credit limits, shorten payment terms or request cash on delivery.
What are the alternatives to a Company Voluntary Arrangement (CVA)?
A Company Voluntary Arrangement is not always the right solution. If the business has no realistic prospect of recovery, other formal insolvency procedures, such as Administration or liquidation, may be more appropriate routes for dealing with debts and resolving the company’s position.
On the other hand, if your company’s financial difficulties are short-term or relatively minor, a CVA may not be necessary, and less formal restructuring options could be more suitable.
Potential alternatives to a Company Voluntary Arrangement include:
- Informal creditor arrangements – A company may be able to negotiate directly with creditors to agree on new repayment terms. Examples include making a Time to Pay Arrangement with HMRC. That can provide flexibility, but does not protect the company from creditor legal action.
- Refinancing or restructuring – In some cases, a business may secure new funding to clear its debts or renegotiate existing lending arrangements. That can improve cash flow and stabilise operations without entering a formal insolvency procedure.
- Restructuring operations – Cost-cutting measures, such as closing loss-making locations, reducing overheads or renegotiating contracts, may improve the company’s financial position and return it to profitability.
- Administration – If debt levels are high or the company is not viable in its current form, Administration provides legal protection while an Insolvency Practitioner seeks to rescue the business, sell it as a going concern or achieve a better outcome for creditors than liquidation.
- Liquidation – If the company is no longer viable, your best option is likely to be voluntary liquidation. An Insolvency Practitioner will sell the company’s assets and use the proceeds to repay creditors as far as possible. Once the process is complete, any remaining debts are usually written off when the company is closed.
Get clear advice on your company’s rescue and closure options
If your business is no longer viable, or you’re unsure whether a CVA is the right solution for you, our licensed Insolvency Practitioners can assess your circumstances, explain your options and guide you on the next steps.
We provide clear, confidential advice and help you understand the implications for your company, your creditors and your position as a director. Get in touch for a free consultation or arrange a meeting at one of our 100+ UK offices for in-person advice and support.
