Company voluntary arrangement

Under UK insolvency law an insolvent company can enter into a company voluntary arrangement (CVA). The CVA is a form of composition, similar to the personal IVA (individual voluntary arrangement), where an insolvency procedure allows a company with debt problems or that is insolvent to reach a voluntary agreement with its business creditors regarding repayment of all, or part of its corporate debts over an agreed period of time. The application for a CVA can be made by the agreement of all directors of the company, the legal administrators of the company, or the appointed company liquidator.

A company voluntary arrangement can only be implemented by an insolvency practitioner who will draft a proposal for the creditors. A meeting of creditors is held to see if the CVA is accepted. As long as 75% (by debt value) of the creditors who vote agree then the CVA is accepted. All the company creditors are then bound to the terms of the proposal whether or not they voted. Creditors are also unable to take further legal actions as long as the terms are adhered to, and existing legal action such as a winding-up order ceases.

During the CVA, payments are made in a single monthly amount paid to the insolvency practitioner. The fees charged by the insolvency practitioner will be deducted from these payments. The company is not required to fund any further costs.

Companies can benefit from a CVA in a numerous way:

• Improves cash flow, quickly.
• Stops pressure from tax while the CVA is being prepared.
• Stops a winding up petition and gets it adjourned.
• Can rapidly cut costs.
• Can terminate employment, leases and onerous supply contracts.
• Terminates property lease obligations.
• Terminates directors and/or managers contracts.
• Removes employees with no redundancy payments of lieu of notice costs.
• Terminates onerous customer/supplier contracts.
• Board and shareholders generally remain in control of the company.
• Has much lower costs than administration and is not publicly announced like administration is.
• Is a good deal for creditors as they retain the customer and receive some of their debt back over time.

Within a CVA, directors retain control of the business.

Directors have a legal duty to act properly and responsibly and to prioritise the interests of their creditors. The risks of liquidating a business may include disqualification from acting as a director of other companies and also personal reputation as a director. In an extreme case directors can be found personally liable to contribute towards the shortfall in payments to creditors. However, as a Company Voluntary Arrangement is in the best interests of creditors, there is no investigation into the director’s conduct.

Under a Company Voluntary Arrangement directors are not personally liable for the company’s debts, unless they have given a personal guarantee. Even if a director has provided a guarantee, a CVA will mean a director is only liable if the company cannot pay and by continuing in business there is a retained a source of income.

See also

• UK company law
• US insolvency law