A limited company with debt problems might use a Company Voluntary Arrangement to recover from insolvency. Check how to apply for a CVA and how the process can be an alternative to liquidation.
What is a Company Voluntary Arrangement
In simple terms, a CVA is a legally binding statutory agreement used in business. The United Kingdom has been using these types of company agreements since 1986.
You might consider it as a rescue option. A CVA allows a limited company to continue trading while paying off its debt.
Thus, it would take place between an insolvent limited company and its creditors.
Company Voluntary Arrangements allow insolvent companies to repay their debts over several years. As a rule, the period of repayment will be a fixed term (often between one and five years).
Even so, the terms of any proposal would need approval from at least 75% of the creditors (by value of the debt). After getting the creditors' agreement, the company would be able to continue trading.
Note: As a sole trader (or self-employed), you would not use the Company Voluntary Arrangement process. You would be applying for Individual Voluntary Arrangements (IVA) instead.
How to Apply for a CVA in United Kingdom
All the directors or members must be in agreement before a company or limited liability partnership (LLP) can apply for a CVA. Other conditions of getting a Company Voluntary Arrangement include:
The company being insolvent (unable to pay its creditors).
The business can prove to an Insolvency Practitioner that it has some 'viability' as a going concern. In short, this means there will be enough future capital to repay its debts. It should remain profitable enough to pay ongoing taxes (e.g. VAT, PAYE).
After examining the company affairs, the Insolvency Practitioner will draft an 'arrangement'. It will cover the amount of debt the company can pay and the terms for a payment schedule. They would have to complete this within one (1) month of their appointment.
They would then write to creditors with the details of the arrangement and invite them to cast a vote on it.
Company Voluntary Agreements need approval from the creditors who are owed at least 75 percent of the debt.
Failing to get 75% approval from the creditors means the business may face voluntary liquidation to pay off its debts.
As a rule, the company would not make the scheduled payments to the creditors. Instead, the payments would go through the Insolvency Practitioner until they get paid off in full.
Failing to meet the agreed payment schedule means any of the creditors can apply to wind up a business.
Company Voluntary Arrangement Advantages
The business gets to trade on as 'usual' and the directors keep control of the company. It also means there may be no need to inform all the trading clients.
In most cases, a CVA would have lower costs than some insolvency rescue procedures (e.g. administration).
Using this type of legal ring-fence helps to reduce creditor pressure. It also means you can freeze some of the interest and charges.
The CVA proposal may mean you get to end 'burdensome' contracts (e.g. employment and supply contracts).
You would be able to include the fees for an Insolvency Practitioner in the agreed monthly fixed repayment amount.
Avoiding liquidation, and a winding up petition, means you also avoid an investigation into director conduct.
Company Voluntary Arrangement Disadvantages
Using a Company Voluntary Agreement (CVA) does not affect personal credit ratings. But, it would affect the credit rating of the limited company for six (6) years. Getting full agreement from the bank can also be a challenge.
Some of the creditors may have an aversion to the length of time that applying for Company Voluntary Agreement takes.
The terms of a CVA do not bind 'secured' creditors (e.g. the bank or HMRC). It means they can still choose to withdraw their funding or seek liquidation.
What is a Company Voluntary Arrangement (CVA) in United Kingdom