A Company Voluntary Arrangement is a formal insolvency rescue procedure for limited companies experiencing financial distress.

Rather than closing the company immediately, a CVA can provide a structured way to deal with qualifying debts while the company continues operating.

The arrangement is prepared with the involvement of a licensed insolvency practitioner and sets out matters such as:

• how creditors will be dealt with;
• what the company can afford to contribute;
• how long the arrangement will run;
• how payments will be made;
• what creditors are expected to receive; and
• what happens if the company does not comply with the agreed terms.

A CVA is not simply a debt-consolidation product.

The fundamental question is whether the business itself is viable.

If the company cannot realistically generate enough cash to meet its ongoing liabilities and the CVA commitments, restructuring historic debt will not solve the underlying problem.

A CVA may be suitable where a company is insolvent or experiencing serious creditor pressure but still has a viable underlying business.

Typical indicators can include:

• the core business remains profitable or could return to profitability;
• historic debts are placing pressure on current cash flow;
• the company can meet future trading costs;
• directors believe the business can generate sustainable cash flow;
• creditors may receive a better return through a CVA than liquidation; and
• directors want to rescue and continue the company rather than close it.

There is no general statutory rule requiring a company to owe at least £4,000 before it can propose a CVA.

The size of the debt matters commercially, but suitability depends far more on viability, affordability, the creditor position and whether the proposal has a realistic prospect of being approved and completed.

A CVA is not a way to keep an unviable company alive indefinitely.

It may be unsuitable where:

• the company continues making substantial trading losses;
• there is no credible route back to sustainable profitability;
• future tax and supplier liabilities cannot be paid;
• the proposed CVA payments would be unaffordable;
• a major creditor is unlikely to support the proposal;
• the business requires fundamental restructuring that a CVA alone cannot achieve; or
• the directors actually want to close the company.

Where the business is no longer viable, a Creditors Voluntary Liquidation may need to be considered instead.

The precise procedure depends on the company’s circumstances, but the broad CVA process involves several stages.

1. Assess whether the company is viable

The company’s financial position, cash flow, creditors and future trading prospects need to be reviewed.

This is one of the most important stages.

A CVA should not be proposed simply because the company can make one reduced payment today. The business needs a realistic prospect of continuing to meet both the CVA obligations and its new liabilities as they arise.

2. An insolvency practitioner helps prepare the proposal

An insolvency practitioner acts initially as the nominee.

The proposal explains how the arrangement would work and what creditors could expect to receive.

It will generally include detailed information about:

• the company’s financial position;
• assets and liabilities;
• creditor claims;
• future cash-flow forecasts;
• the proposed contributions; and
• the expected outcome for creditors.

3. Creditors consider and vote on the proposal

Creditors entitled to participate are given the opportunity to consider the CVA.

The proposal requires approval from at least 75% by value of creditors who vote.

There is also an important safeguard concerning connected creditors. Broadly, a proposal cannot be approved if more than half by value of the unconnected creditors who vote oppose it.

This prevents directors or other connected parties from using their voting position to force an arrangement through against the wishes of independent creditors.

4. The approved CVA becomes binding

Once approved, the CVA takes effect in accordance with the statutory rules and the terms of the proposal.

The company then needs to comply with the arrangement.

The directors normally remain responsible for running the business, while the insolvency practitioner becomes the supervisor of the CVA.

For the full procedure, see our CVA process guide.

Usually, yes.

One of the major differences between a CVA and administration is that the directors normally remain in control of the company’s day-to-day operations.

The insolvency practitioner supervises the arrangement rather than taking over management of the business.

That makes a CVA attractive where:

• the management team is capable of running the business;
• the underlying business remains commercially viable; and
• the primary problem is historic debt or cash-flow pressure.

However, directors still need to comply with their legal duties, particularly where the company is insolvent.

A CVA does not remove those responsibilities.

A CVA will often principally restructure unsecured creditor debts.

These could include amounts owed to:

• trade suppliers;
• landlords;
• HMRC;
• utility providers;
• finance companies in relation to unsecured liabilities; and
• other unsecured creditors.

However, it is misleading to say that all company debt is simply moved into one monthly payment.

Different classes of creditor have different rights.

In particular, the rights of secured and preferential creditors cannot simply be altered without the required consent.

The precise treatment of individual debts therefore needs to be considered when the proposal is prepared.

Where HMRC is one of the company’s largest creditors, its position can have a major influence on whether the proposal succeeds. See our guide to using a CVA with HMRC debt for more detail on VAT, PAYE and Corporation Tax arrears.

Potentially, yes.

HMRC is frequently a significant creditor in company insolvency situations.

A CVA may include qualifying historic liabilities such as VAT, PAYE or Corporation Tax, depending on the circumstances and the proposal.

However, HMRC assesses CVAs on their merits.

A company seeking HMRC support should expect scrutiny of:

• the viability of the business;
• the company’s tax compliance history;
• the directors’ conduct;
• the accuracy of forecasts;
• the proposed return to creditors; and
• whether future tax obligations can be paid on time.

A CVA should not be treated as permission to continue building up tax debt.

HMRC guidance also makes clear that some future Corporation Tax liabilities can fall outside the arrangement and remain payable in the usual way.

We’ll cover this in more detail in our dedicated CVA and HMRC guide.

There is no fixed percentage that every company has to repay.

The amount depends on:

• what the company can realistically afford;
• its assets and liabilities;
• projected future cash flow;
• creditor expectations; and
• what creditors would receive under alternative insolvency procedures.

Some CVAs may provide for creditors to receive their debts in full over a longer period.

Others may involve creditors accepting only part of what they are owed.

The proposal needs to be commercially credible.

A company cannot simply choose an attractive monthly payment and expect creditors to accept it.

A CVA is not risk-free.

Potential disadvantages include:

• the company remains subject to an insolvency procedure;
• monthly contributions may continue for several years;
• access to credit may become more difficult;
• creditors must approve the proposal;
• directors need to maintain strict financial discipline;
• ongoing taxes and new liabilities still need to be paid; and
• failure can expose the company to renewed creditor action.

A CVA also does not automatically remove a director’s personal liability under a personal guarantee.

A personal guarantee is a separate agreement between the director and creditor. Its treatment should therefore be considered separately when assessing the director’s personal exposure.

Once a CVA has been approved, creditors bound by it must generally comply with its terms in relation to debts covered by the arrangement.

But a CVA should not be described as automatically removing every creditor right in every circumstance.

The position can depend on:

• whether the creditor is bound by the CVA;
• the type of debt;
• secured or preferential status;
• the terms of the proposal; and
• whether the company complies with the arrangement.

There may also be circumstances in which additional protection from creditor action is needed before a CVA is approved.

Options such as a company moratorium or administration may need to be considered where creditor pressure is particularly severe.

Failure does not necessarily mean that the company is automatically liquidated on the same day.

However, it can be serious.

If the company breaches the CVA and the problem cannot be resolved in accordance with its terms, the arrangement may terminate.

Creditors may then regain the ability to pursue enforcement action, and the company may ultimately need to consider:

• a revised rescue strategy;
• administration; or
• liquidation.

Government guidance confirms that creditors may apply to wind up a company if it fails to maintain the agreed payment schedule.

This is why the affordability of the original proposal matters so much.

A useful starting question is:

Would the business be viable if its historic debt burden could be brought under control?

A CVA may deserve further consideration if:

• the core business has a realistic future;
• future trading can be profitable;
• current liabilities can be paid as they fall due;
• the company can afford regular CVA contributions;
• creditors are likely to achieve a better outcome than liquidation; and
• the directors genuinely want to continue the business.

If those conditions are not present, a different rescue or insolvency procedure may provide a more realistic solution.

If your company is struggling with creditor pressure but the underlying business remains viable, acting early can give you more options.

Business Helpline provides free, confidential and unbiased initial advice to limited company directors.

We can help you understand:

• whether the company appears suitable for a CVA;
• whether the proposed repayments could be realistic;
• how creditors and HMRC may need to be dealt with;
• how a CVA compares with administration or liquidation; and
• what the next practical steps could involve.

Call our free 24-hour helpline on 0800 088 2142 or request a confidential call back.