What is a Company Voluntary Arrangement?

If you're in need of a debt solution for your business, you might have heard the term "Company Voluntary Arrangement". This type of agreement is a legally binding contract that can help you better manage cash flow and deal with escalating debts.

What is a voluntary arrangement for a company?

A Company Voluntary Arrangement or CVA is a formal insolvency procedure, enabling businesses that are struggling financially to come to an agreement with creditors to start repaying their debt.

So while your business restructures and starts to recover, you can enjoy a bit of breathing space when relating your debt over an extended period of time.

How does a CVA work?

First, you find an insolvency practitioner, then, together with your directors, you can approach the creditors with a repayment plan. The repayment plan typically spans between three and five years and involves repaying only a fraction of the original debt owed.

The CVA process follows these four steps:

1. Initial assessment

If you’re not sure whether a CVA is the best option for your business, it’s at this stage that the insolvency practitioner will assess your finances to determine if a CVA is appropriate. To accurately assess your situation, the insolvency practitioner will need information about your business finances, including assets and liabilities, cash flow forecasts, etc.

2. Proposal preparation

Together with your directors, the IP creates a CVA proposal. This proposal outlines your plans for repaying your debts, restructuring, and demonstrates your ability to continue trading.

3. Creditor voting

It’s time for the creditors to consider your proposal. Only creditors making up at least 75% of the debt have to accept the proposal for it to be implemented. Then it’s submitted to the court, and both shareholders and creditors each receive copies.

4. Implementation

The company remains in control of its directors, but must follow the agreed payment plan. The nominee (usually the licensed insolvency practitioner) will monitor compliance with the CVA. If the directors don’t comply with the CVA terms, the company faces liquidation or administration.

Five benefits of a company voluntary arrangement

1. You can keep trading

The most significant benefit is that you can continue trading while addressing company debts. So there's no need to issue staff with redundancies or lose control of the business, keep control, keep staff employed and preserve customer relationships.

2. Considerably reduce your debt

The type of agreement means creditors can agree on a repayment as little as 20-30% of the original debt owed.

3. CVAs are more favourable than liquidation

As they're viewed more favourably, you're more likely to retain customer and supplier relationships, thus preserving your business reputation.

4. Protected against legal action by creditors

As a CVA is legally binding, once approved, the creditor can't employ aggressive debt collection tactics.

5. CVAs are designed around your specific needs

If your business has income seasonality, for example, the CVA can take this into account when mapping out a repayment plan.

Company voluntary arrangement disadvantages and risks

As with any debt solution, putting a CVA in place comes with some drawbacks you should be aware of. They include:

• It can negatively impact your credit score. As these agreements are registered at Companies House, they're in the public domain, so future lenders can see them, which can affect any attempts to secure funding in the future.
• Could face legal action from your creditors. If you fail to meet the terms of the CVA, you can face further insolvency action, including liquidation.
• High implementation costs. As you must work alongside a licensed insolvency practitioner, the fees associated with this process can be expensive and unavoidable.
• Must get approval from the majority of creditors. Unsecured creditors representing at least 75% of the owed debt must all agree to the CVA, which can be a long process and doesn’t always result in a CVA.

Why would a creditor consider a CVA?

A CVA means creditors are more likely to recoup at least some of the outstanding debt rather than losing a lot more through liquidation. A CVA enables companies the chance to restructure and recover while repaying a smaller, more manageable debt. And by helping the business recover, it puts them in a better position to afford the newly restructured debt repayments, which is better for the creditor.

Is a CVA the right option for my business?

If your business is viable, but the only thing holding it back is debt repayments, there's a good chance a CVA is the right decision for you. A CVA ultimately buys the business space from their debt so it can recover and continue operating successfully without the burden of its original debt.

A CVA might be worth considering:

• If your company is viable but facing financial difficulties or insolvency
• If you need a debt solution that’s less damaging to your business reputation than liquidation
• If you need protection from creditor legal action
• If you need to restructure your debt
• If directors want to keep control rather than pass control to an administrator

Can I get a loan with a CVA?

Although it’s possible to get a business loan with a CVA, you’ll find your options limited as you’re deemed a high-risk borrower. Your best chance of obtaining a loan is to apply for a secured business loan. This significantly reduces the risk, because you’re offering collateral that the lender can seize should you default on repayments, i.e. commercial property or another business asset.

Next steps

Finding an insolvency practitioner is essential before you explore a CVA further. And finding one is relatively straightforward. You can use the Government’s online Insolvency Practitioner Directory. These practitioners are properly licensed.

Or, if you already have a CVA in place, but you’re looking to plug short-term cash flow issues, you can consider alternative business financing options — from invoice finance to asset finance and bad credit loans.

Explore our business funding products or compare business loans today.