A CVA is a formal, legally binding agreement between an insolvent company and its creditors. It is a powerful and flexible insolvency procedure that enables a viable company to reach a compromise with its creditors, allowing the business to be restructured, costs to be cut and creditor pressure to be reduced.
Typically, a CVA is used for businesses with temporary cash flow difficulties, perhaps caused by a one-off incident such as a significant bad debt or the ill health of a key company officer.
In order for the CVA to be acceptable to creditors, the directors must demonstrate that normal business patterns have been resumed, the company has returned to profitability and accordingly has the ability to repay its creditors (either in full or in part) over time.
In order for a CVA to be approved, it requires more than 75%, in value, of creditors who vote on the CVA proposal (at a meeting of creditors convened for this purpose) to be in agreement. This means that if the company has one or several large creditor(s), it is they who can effectively control the outcome of the process.
On the other hand, as long as the larger creditors are in agreement, then the CVA will be binding on all creditors, including any smaller creditors who had perhaps voted against it.
It is not necessarily the case that a company will have to offer to repay 100% of its debts. In most CVA cases, creditors only receive a fraction of the debt, often less than 50%. As long as the directors can demonstrate that the CVA proposal represents the best offer to creditors (usually that means the CVA will yield a better return to creditors than under a Liquidation scenario) then in all likelihood it will be accepted by creditors.
An important feature of CVAs is that the company’s management remains in control of the business throughout the duration of the CVA, which is typically between 2 to 5 years. The insolvency practitioner appointed to ensure the terms of the CVA are adhered to (‘the Supervisor’) does not get involved in the day-to-day running of the company.
When the CVA has been successfully completed, the company is handed back to the directors and shareholders.
Unfortunately, if the terms of the CVA proposal are not adhered to, or the company incurs liabilities after the approval of the CVA, then the arrangement will fail and the company may be placed into Liquidation or Administration.