Why use a Company Voluntary Arrangement (CVA)?
A Company voluntary arrangement can be a cost effective solution if your company is experiencing financial difficulty but you expect the business to recover in the near future. Scottish directors make an official agreement between the company and its creditors on how to repay the outstanding company debt over a specific period of time. It is essentially a further time to pay action with a moratorium put in place to remove creditor pressure and freeze interest.
The aim of a CVA is to;
- Provide rescue and recovery to a viable business
- Save trade relationships and jobs
- Maximise return to creditors than alternatives
- Offer the best chance for ROI for shareholders
It is a useful tool and is often looked on favourably by creditors including HMRC as they are likely to receive more money back than if the company was to go into liquidation. Your Insolvency Practitioner will be able to negotiate on your behalf and may get some of the debt removed as part of your agreement to fixed terms.
The important thing to remember, as is the case with all business rescue procedures, you need to act as soon as you possibly can. Early decisions by company directors will always lead to more options and better outcomes.
As a director you have a duty to act in the best interests of your creditors to avoid allegations which may cause you problems in the future. Please don’t leave matters until they escalate. If you are starting to miss payments call us immediately.
Can my company use a CVA?
Your company will need to be insolvent. There are insolvency tests that can be taken to establish this. Once insolvency is confirmed you will want to speak to an adviser who will assess your companies finances and see if it is a viable option. Sometimes Company Administration is used in conjunction with a CVA to alleviate cash flow problems. This route can give the company breathing space whilst it generates extra money from restructuring or the sale of assets.
Either way, you should keep on good terms with your creditors and keep communicating with them. A CVA requires that your creditors and your company can agree on the conditions of the arrangement. Therefore, it is important not to erode the trust or damage your companies relationship with them. They need to believe that you will fulfil your end of the agreement. If you have been promising them payment and not paying them for some considerable time and they are now threatening legal actions by petitioning the court for a winding up order then you may find it more difficult to convince them that your company will actually pay.
What is the CVA process in Scotland?
Step 1. Assessment – contact an Insolvency Practitioner who can assess your financial situation and talk you through all your options
Step 2. General Meeting – shareholders agree to use a CVA and appoint an Insolvency Practitioner
Step 3. Draft CVA – your Insolvency Practitioner will gather all the information needed and present a draft proposal to directors and shareholders. Once all terms can be agreed then the final documents will be submitted to the court and copies sent to all creditors.
Step 4. Creditors & Shareholders Meetings – a minimum of three weeks must pass before these meetings are held. They are normally conducted on the same day, one after the other. Essentially both meeting have to vote to approve the CVA. The shareholders meeting requires at least 50% vote in favour and the creditors meeting requires at least 75% vote in favour. Amendments can be voted for and the same voting percentages are required to accept the changes
Step 5. Approval – if the CVA is accepted then the creditors, shareholders and the court will all receive a report documenting the outcome of both meetings.
Step 6. Trust account created – your company will begin making monthly payments into this account for the duration of the term agreed. Your company will not be subjected to any harassment from creditors as long as payments continue. It is important that your company does not default on these payments as this could lead to your creditors approaching the court with a winding up petition.
How long does the CVA process take?
The entire CVA process can be completed in under 2 months in most cases. It helps if you can provide all the information your Insolvency Practitioner needs quickly.
How much does a CVA Cost?
Fees in insolvency are almost identical across the industry. Companies like to suggest that they are cheaper than their competition but inevitably once you engage their services you will find your final bill will be about the same.
There are two main fees;
- The Nominee Fees – Approx £5,000 + Vat
- Supervision Fees – This monthly fee is set by the creditors and is to pay the insolvency firm for managing the account throughout its term.
Insolvency fees are normally affected by company size, debt level, number of creditors and current relationship with those creditors, ie. how much negotiating will be required.
You have to seriously consider what is in your best interests. Entering a Creditors Voluntary Arrangement is a legally binding financial commitment which can run for 3 to 5 years. However, many companies do successfully use this process to their advantage. It allows you to keep control of your company and continue to use its profits, protect your brand reputation and get some of the debt written off. The process also avoids some of the negative aspects of an administration or liquidation. The only condition is that you keep making your agreed single monthly payment.
The Insolvency (Scotland) (Company Voluntary Arrangements and Administration) Rules 2018 is the current legislation governing Company Voluntary Arrangement (Scotland) and contains the latest updates. The process is only available to companies who can demonstrate that they are insolvent.