Under the Enterprise Act 2002, there are two main ways of trying to rescue or save all or part of a company that is in financial difficulties. These are by Company Voluntary Arrangement (CVA) or by Administration.
This is a freeview 'At glance' guide to Company Voluntary Arrangements (CVA).
At a glance
What is Administration?
A company is placed into administration on the appointment of an administrator. This can be done without a court hearing, by the directors, the company, or by the holder of floating charge over the company's assets. It cannot be done if the company has already been subject to a CVA in the past 12 months or is subject to insolvency proceedings. See Administration.
What is a Company Voluntary Arrangement (CVA)?
Under a CVA the directors make a proposal to the company’s creditors to enable the company to be saved by accepting less than they are owed. If the company agrees by a majority, and 75% of the creditors agree, the proposal is binding on all the creditors.
Small companies (as defined by the Companies Act) are able to obtain a 28-day moratorium from their creditors to allow them time to put forward a proposal. This is obtained by filing an outline of the intended proposals with the court, together with a report by the insolvency practitioner nominated to oversee the proposal.
A CVA has several advantages:
- Management control remains with the directors.
- A CVA can be a cheaper option than administration because although the arrangement is supervised by an insolvency practitioner, the directors are responsible for carrying out the proposal.
- Small companies have a 28-day moratorium from their creditors which gives them breathing space to map out a suitable proposal.
- A simple and easy process, ideal for small and uncomplicated businesses.
There are also disadvantages:
- The insolvency practitioner; it can be difficult to monitor the arrangement outside the company (their actions are also open to challenge by all parties).
- The directors have to file detailed proposals of the intended arrangement at an early stage.
How to start a CVA
You need to enlist the help of a licensed insolvency professional, then ensure that your accounts and cash flow forecasts are up-to-date, draw up a statement of affairs, create a proposal, and then start negotiating.
Most creditors will prefer to accept something rather than nothing, but 75% have to accept your proposal.
This may be difficult if your main creditor, for instance, your bank does not have any faith in your management abilities.
For step-by-step help for directors, see Insolvency FAQs for boards.
