When a business is under serious financial pressure, the challenge is often finding a way to deal with historic debt without shutting the doors. For many directors, protecting employees and keeping the company trading is just as important as settling what is owed.
A Company Voluntary Arrangement, commonly known as a CVA, is one option that can help achieve both. It is a formal insolvency procedure that allows a business to repay creditors over time while continuing to operate. This article explains what a CVA is, how it works, who it is suitable for, and what impact it can have on creditors and employees.
What is a Company Voluntary Arrangement?
A Company Voluntary Arrangement is a legally binding agreement between an insolvent company and its creditors.
It is designed for businesses that are struggling with debt but still have a viable core operation. Rather than closing the business and selling assets, a CVA allows the company to restructure its debts and repay what it can afford over an agreed period.
The arrangement limits the company’s liability for historic debts and ensures that directors are not personally responsible for company liabilities, provided they have acted properly.
A CVA can be proposed by a company director, a creditor, or an Insolvency Practitioner. The Insolvency Practitioner acts as supervisor of the arrangement and ensures the agreed terms are followed.
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Check my eligibilityWhen is a CVA most suitable?
A CVA is often suitable for companies that would be profitable if they could deal with past debt. This might include businesses affected by rising costs, reduced demand, or unfavourable contracts agreed during stronger trading periods.
It can be particularly useful where jobs are at risk and liquidation would cause unnecessary disruption. A CVA offers the chance to stabilise finances, settle debts fairly, and continue trading.
How does a Company Voluntary Arrangement work?
While every CVA is tailored to the business, the process usually follows a clear structure.
Preparing the CVA proposal
The first step is working with an Insolvency Practitioner to prepare a CVA proposal.
This involves reviewing the company’s finances in detail, including assets, liabilities, cash flow, and future projections. The Insolvency Practitioner works with the directors to design a repayment plan that is realistic and sustainable.
The proposal sets out how much will be paid to creditors, over what period, and how the business will continue operating.
Moratorium protection
Unlike an administration, a CVA does not automatically provide a moratorium that stops creditor action.
However, some smaller companies may qualify for a statutory moratorium if they meet certain criteria. These include having no more than 50 employees, balance sheet assets below £5.1 million, and turnover under £10.2 million.
Where available, this protection can prevent creditors from taking legal action while the CVA is being considered.
The creditors’ decision
Once the proposal is finalised, it is shared with creditors. A creditors’ meeting then takes place, although this is often handled through written or proxy voting rather than a physical meeting.
For the CVA to be approved, creditors representing at least 75% of the total debt value must vote in favour. Directors are not usually required to attend in person.
If approved, the CVA becomes legally binding on all creditors.
Starting the CVA
The arrangement begins when the company makes its first agreed contribution.
The Insolvency Practitioner collects payments and distributes them to creditors according to the terms of the CVA. As long as payments are maintained, the company is protected from creditor enforcement action.
If the company fails to keep up with payments, it will be in breach of the agreement. In most cases, this leads creditors to push for compulsory liquidation.
Who is eligible for a CVA?
Company Voluntary Arrangements are available to businesses that are insolvent or likely to become insolvent.
They are usually considered where total debts are £150,000 or more. Directors must be willing to include all creditors in the arrangement and show that the business cannot be rescued without formal intervention.
Crucially, there must also be a realistic prospect of creditor support. If creditors are unwilling to negotiate, a CVA is unlikely to succeed.
How long does a Company Voluntary Arrangement last?
Most CVAs last between two and five years. The exact length depends on the company’s financial position and ability to repay creditors.
In most cases, the arrangement cannot be changed during the first 12 months. After that point, early completion may be possible if the company is able to raise a lump sum through borrowing or investment.
Any early termination must be approved by creditors holding at least 75% of the debt value.
Does a CVA apply to all creditors?
Yes. Once approved, a Company Voluntary Arrangement is legally binding on all creditors.
This includes unsecured creditors, secured creditors, those who voted in favour, and those who voted against the proposal. Creditors have a 28-day window to challenge the CVA on grounds of unfair prejudice or procedural issues.
Once that period has passed, creditors are required to adhere to the arrangement.
How does a CVA affect employees?
In most cases, employees are not directly affected by a Company Voluntary Arrangement.
The business continues to trade, wages continue to be paid, and contracts of employment remain in place. This is one of the key advantages of a CVA compared to liquidation.
That said, some CVAs involve business restructuring, which can include changes to departments or staffing levels. The most significant risk to employees arises if the CVA fails and the company enters compulsory liquidation.
CVA versus administration
Directors often ask how a CVA differs from administration.
Administration places the company under the control of an administrator and usually involves stopping trading and selling assets to repay creditors. It does not require creditor approval at the outset.
A CVA, by contrast, allows directors to remain in control and continue trading. It focuses on dealing with debt alongside day-to-day operations rather than shutting the business down.
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Getting advice when your business is under pressure
Facing financial difficulty as a director is extremely challenging. The pressure does not just affect you, but also your employees, customers, and suppliers.
If your business is struggling with debt, early professional advice is essential. A qualified Insolvency Practitioner can help you understand whether a Company Voluntary Arrangement is realistic, or whether another option would better protect the business.
