While it may be true that many businesses fail during a time of recession of financial turmoil, many of those companies don’t deserve to fail.

In a difficult economic climate, businesses can often struggle to prosper and survive, meaning that we often seen businesses go under as a by-product, which would do well in other circumstances.

However, there are some solutions available that could prevent the collapse of a potentially profitable company.

When a profitable future appears viable for a currently struggling business, and the directors involved with that organisation are willing to continue forwards, something called a “Company Voluntary Arrangement” or CVA, could be an ideal way to protect a group against the legal actions often taken by creditors.

The terms of a CVA generally provide a business with lower monthly outgoings, and allow them to take control of their debt, rather than simply giving up and allowing the business to close down.

Of course, what may save one business will not necessarily be beneficial to another – so how can you determine whether a company voluntary arrangement is right for you? This article should be able to help.

What is a Company Voluntary Arrangement?

In the most basic terms, a Company Voluntary Arrangement is an insolvency process arranged between a financially-strapped debtor, and its creditors with the aim of avoiding asset liquidation.

The CVA was introduced during the Insolvency Act of 1986, but unlike other insolvency processes, it was created to rescue a company in need, rather than simply help that company sell off assets.

Under a voluntary arrangement, the business is allowed to continue as normal, paying off debts over a period that has been pre-agreed.

In most circumstances, a typical CVA runs for a period of 5 years.

When properly utilised, a company voluntary arrangement can be a source of rescue, offering most companies a lifeline so long as they agree to follow the proposal as agreed with their creditors.

A CVA may allow a company to:

• Reduce and freeze debts so as to save a company from liquidation.

• Pay back creditors with monthly contributions taken from future profits.

• Plan an in-depth process in how to become profitable and generate more cash.

However, in order to instigate a CVA, directors will be asked to prepare and present a proposal to their creditors that explains exactly how they plan to rescue the company and deal with outstanding creditor claims.

What are the benefits of a CVA?

Aside from the obvious advantages associated with a company voluntary arrangement (saving the company from liquidation), the process also delivers a number of other benefits, including:

• The halting of pressure from HMRC and creditors while the proposals are drafted (although a CVA is not legally binding until it has been accepted, HMRC and other creditors usually hold off from further action until the proposals have been considered).

• The protection of the company against any legal actions taken by creditors while the CVA is active (so long as the terms of the arrangement are met).

• Centralising creditors into a single monthly payment that is often easier for companies to manage. Arguably the main benefit of CVA is that it will reduce the company’s cash outgoings on a monthly basis to an affordable level.

• Directors and company shareholders remain in control of the business.

• Stopping a winding up petition from putting a company out of business.

• Facilitating a mutually beneficial deal that works for your interests, and the best interests of your creditors, so long as they have some of their debt repaid in a reliable manner.

• Improving cash flow.

Is your company eligible for a CVA?

Before a company gets too excited about the possibility of using a company voluntary arrangement or CVA to facilitate the turnaround of their business, it’s important to make sure that the company is eligible and/or suitable for the process.

Following are a few key points to consider:

1. Your company must be contingently insolvent, or insolvent.

2. The insolvency practitioner and directors must be confident that the future of the business is profitable, and that the company has a realistic chance of recovery.

3. Your company must have a forecast of cash flow that indicates you will receive enough capital or income to cover any agreed-upon repayment amounts.

It is only possible to apply for a CVA using a licensed insolvency practitioner, such as those employed by Robson Scott.

Once you have gotten in touch with your insolvency practitioner, an arrangement will be decided that covers the amount of debt you are capable of paying (according to cash flow estimates), and a payment schedule over a period of years.

Your insolvency practitioner will write to your creditors regarding the proposed agreement, and invite them to vote on a decision. In order to be eligible for a CVA, the proposal must be approved by over 75% of voting creditors (by value). See our example CVA to see how this works.

If the CVA is not approved, we will discuss with you other options such as voluntary liquidation.

Is your company suitable?

So long as the right circumstances are in place, a Company Voluntary Arrangement can provide a highly effective and viable alternative to liquidation.

With a CVA, businesses are able to retain their assets and continue in the process of trading, with the plan of achieving better profits and success.

If you are currently overwhelmed by the threat of legal action from creditors, and you do not see a reasonable way of paying of the debts that you have collected in the short term, then a company voluntary arrangement may be worth considering.

During this procedure, you will receive the essential freedom that you need to think carefully about your current finances and develop a plan of action that will help you manage your debts.

At the same time, you will also benefit from the help of a professional insolvency supervisor that guides you through the procedure.

Please contact Eamonn at ewall@robsonscott.co.uk for a confidential chat.