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or hWhat is a CVA?
In short, CVA stands for Company Voluntary Arrangement which is where a company comes to an agreement with its creditors to repay them over a longer period of time. This gives the company breathing space to continue to trade whilst repaying its debt. Usually the repayments to creditors under a CVA are between 36 and 60 months. In most cases, the creditors in the CVA agree to a reduced percentage of their original debt being repaid. Its sole purpose is to rescue the business and make it viable again whilst being in the best interests of its creditors.
Why do creditors accept CVA’s
If a creditor was not to support a CVA then usually, the only other option for the Directors is to liquidate their company. When a company enters liquidation, the creditors usually receive very little or no repayment of what they are owed. In order for a CVA to be put forward, an Insolvency Practitioner must be of the opinion that;
- The details in the proposal are a fair reflection of the company’s financial position.
- It has a reasonable chance of being approved and implemented.
- That it is not unfair to any parties involved.
In order for the CVA to be approved, 75% of creditors must accept the proposal being put forward. Once approved, the CVA holds all creditors under a legally binding agreement which includes creditors that voted against the CVA.
When is a CVA applicable?
Sometimes due to an unavoidable occurrence, an otherwise profitable business may find themselves unable to afford to pay its liabilities as and when they fall due and it wants to avoid liquidation. Usually, the company will have good relationships with its suppliers and may need to restructure or make changes to the way it operates or has profitable orders but lacks cash flow due to late payers and bad debts. In these instances, a CVA allows the company time to overcome these issues and make the changes it needs to become viable once again.
The company must provide a cash flow forecast showing the income and outgoings and identifying the amount of funds available to creditors whilst also showing that it can continue to pay its ongoing liabilities. If creditors do not believe that the company can maintain payments under the CVA whilst also continuing to trade successfully then they may not accept the proposal.
What is the process of implementing a CVA?
The procedure is usually initiated by the Directors of the business who instruct an Insolvency Practitioner, creditors or shareholders cannot start this process.
The Directors’, with the assistance of the Insolvency Practitioner, create the CVA proposal which sets out the terms that the company is asking its creditors to accept. The main structure of the proposal is what the payments level will be and the terms of repayments. Within 28 days of the Insolvency Practitioner receiving the proposal, he must submit a report to the court confirming that he believes that a meeting of shareholders and creditors should be held.
Once filed in court, the proposal is issued to Shareholders and creditors and 50% of shareholders and 75% of creditors must vote in favour of the proposal for it to be accepted. The creditors may ask for the proposal to be modified prior to them accepting it. This must be agreed by the company and creditor prior to the proposal being approved,
Advantages of a CVA
- Directors to remain in control of the company
- No investigation into the Directors conduct
- Structured repayment of the company debt
- Shareholders to retain their stake in the company
- Legally binds the creditors to the agreement
- If implemented successfully, guarantees a return to the creditors.
Disadvantages of a CVA
- There is no guarantee that your creditors will accept the proposal
- If the repayments are not maintained it could still end in the company being liquidated
- It does have a negative effect on the company’s credit rating.
JT Maxwell Limited, Unit 1, Lagan House, 1 Sackville Street, Lisburn, BT27 4AB.
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What should I do if insolvency appears likely?
Do not bury your head in the sand! If you are a company director, you should certainly not just resign (which could be a breach of your duty as a company director) and do not just continue to trade (which could lead to personal liability). Take advice as soon as possible and act on that advice and, in particular, do not transfer assets without first obtaining advice.
What are the consequences of being a director of a company which has been put into administration or liquidated?
You could be made personally liable for your company's debts and could face criminal prosecution, a fine, and/or disqualification as a director. If you have personally guaranteed the company's debts you will be required to honour those guarantees. For the next five years you are not allowed to be a director of another company with a similar name without the court's permission.
Will I be disqualified as a director?
In reality this seems unlikely as less than 10% of directors of insolvent companies are disqualified. But disqualification proceedings may be brought if warranted by the directors conduct, but even in those cases the Insolvency Service would usually seek to obtain an undertaking from the director which has the same effect as a disqualification order. The minimum period of disqualification is 2 years and the maximum 15 years and prevents an individual from being a director of a company or being concerned in or taking part in the promotion, formation or management of a company.
Will I have to face the company’s creditors?
If there is an insolvent liquidation, then a meeting of creditors must be convened. In a creditor’s voluntary liquidation, a director is required by statute to attend and chair the Meeting of Creditors, however in a Court liquidation this is at the discretion of the interim Liquidator.
Our aim here at JT Maxwell is to help change the perception of our industry. And the reason for this is simple: we passionately believe that the service which we provide is incredibly valuable, not just for businesses, but also in a personal context.
JT Maxwell Limited, Unit 1 Lagan House, 1 Sackville Street, Lisburn, BT27 4AB.
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