Company Voluntary Arrangements Frequently Asked Questions

What is a CVA?

A CVA is a Company Voluntary Arrangement.

It is a mechanism that allows an entity to reach an acceptable settlement of its liabilities/debts that are too great to allow it to continue outside of a CVA, in other words the entity would close without it.

 

Does a CVA mean the company will close?

No.  If the CVA is approved the company will continue in existence and be able to continue.

 

Who decides on the terms of the CVA?

The Licensed Insolvency Practitioner works with the directors to agree the terms that achieve the objective of balancing the interests of creditors and the company.

Creditors may ultimately have the final say on the contents, but creditors can only seek to vary the terms if, when it comes to voting, their debt is sufficiently high to influence the voting.

 

How long does the CVA last?

It lasts as long as the terms of the proposal dictate.

 

How is the CVA approved?

It is approved by creditors voting at a meeting.  Each creditor has a vote equal to the value of their claim, so if a creditor is owed £1,000 they have a vote for £1,000, if another is owed £50,000 they have a vote for £50,000, and so on.

When votes are cast 75% or more must support the CVA proposal for it to be approved.

When voting creditors can vote to accept, reject or vary the terms the CVA.  As described above a creditor’s voting position or influence is dictated by the value of their debt.

 

Once it has been approved by the creditors, the shareholders then vote upon the proposal.  It is hoped the shareholders will support the views of creditors and not oppose it because opposition will leave both the members and the company in a difficult position where a court hearing may be needed.

 

What happens if the CVA is rejected?

The company will be in the same position it was before the CVA was put forward.  A difficult decision will then need to be made by the directors as to which insolvency process the company goes into.                                                               

Why can’t the company carry on as it is?

The directors have significant responsibilities to act in the best interest of all stakeholders, but more importantly to make sure the interests of those with a financial stake are not worsened by their actions.  Any worsening of this position is a breach of the statutory duties of a director and could result in personal liability.  The directors have a very difficult balancing act, but must take action because the law dictates that their duties overrule the personal desires of those connected with the company and themselves.

 

Why do we need to involve Lucas Johnson? 

Entering into a CVA is a complex process that is subject to stringent legislation under the Insolvency Act 1986 and Insolvency Rules 1986 and needs to be prepared with the assistance of a Licensed Insolvency Practitioner.

A Licensed Insolvency Practitioner then needs to act in 2 capacities during the process – these are termed Nominee and Supervisor.  The Nominee assists with the preparation of the proposal and has to report on the appropriateness of the proposal for creditors as well as then calling and holding the meetings.

Once the CVA is approved the Supervisor oversees the implementation of the terms and conditions of the proposal.

Kevin Lucas of Lucas Johnson is an Insolvency Practitioner licensed by ICAEW.

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