A guide for businesses facing financial difficulties
When a business encounters financial difficulties, directors are often faced with difficult decisions about how to stabilise the company, protect jobs, and preserve value for creditors and stakeholders. One option that may be available is a Creditors Voluntary Arrangement (CVA).
A CVA can provide struggling businesses with a structured route to repay creditors whilst continuing to trade, potentially avoiding more formal insolvency procedures. However, it is important to fully understand how the process works, its advantages, and the potential risks involved before proceeding.
At Blake Turner Solicitors, our London-based insolvency solicitors work alongside insolvency practitioners and business owners to provide practical legal guidance throughout the CVA process.
What Is a Creditors Voluntary Arrangement?
A Creditors Voluntary Arrangement (CVA) is a formal agreement between a company and its unsecured creditors. The arrangement allows a business experiencing financial difficulties to propose a plan to repay part, or all, of its debts over an agreed period whilst continuing to trade.
Typically, the company proposes to pay creditors a reduced amount of the outstanding debt through affordable instalments over several years. An insolvency practitioner is responsible for overseeing the process and helping prepare the proposal submitted to creditors.
If the required majority of creditors approve the proposal, it becomes binding on all unsecured creditors, even those who voted against it. Secured creditors, are generally not bound by the arrangement.
How does a CVA work?
The process generally follows several key stages:
Financial assessment
The company’s financial position is reviewed to determine whether a CVA is a realistic option. This includes analysing assets, liabilities, cash flow, creditor balances, and future trading prospects.
Preparing the proposal
A detailed proposal is prepared, setting out:
- The company’s current financial position
- The causes of the financial difficulties
- How much creditors are likely to receive
- Proposed repayment terms
- Projected future trading performance
Solicitors often work alongside insolvency practitioners to address contractual issues, creditor claims, and legal considerations.
Creditor approval
The proposal is circulated to creditors, who are invited to vote on the arrangement. If the required voting threshold is achieved, the CVA becomes effective and binds unsecured creditors.
Ongoing compliance
The company continues trading whilst making agreed contributions towards its historic debts. The insolvency practitioner monitors compliance throughout the arrangement.
What are the advantages of a CVA?
For some businesses, a CVA can provide significant benefits.
Business Continuity
Unlike liquidation, a CVA allows the company to continue trading whilst addressing its debts.
Director Control
The existing directors generally remain in control of day-to-day operations, although the arrangement is supervised by an insolvency practitioner.
Improved Cash Flow
By agreeing affordable repayment terms, a business may be able to alleviate immediate financial pressure and focus on returning to profitability.
Preserving Value
Where a company has valuable contracts, goodwill, employees, or customer relationships, a CVA may help preserve those assets rather than forcing closure.
What are the disadvantages of a CVA?
Whilst CVAs can be effective, they are not suitable for every company.
One significant challenge is that there is generally no automatic protection from creditor enforcement action while the proposal is being considered. This means landlords, suppliers, or other creditors may still take action against the company.
In addition:
- Secured creditors are not usually bound by the CVA. [blaketurner.com]
- The company remains responsible for ongoing trading liabilities.
- Historic debt repayments can place long-term pressure on cash flow. [blaketurner.com]
- Failure to meet the agreed terms can result in further insolvency proceedings.
For these reasons, some businesses may ultimately decide that administration or another insolvency solution is more appropriate.
Why should you seek legal advice before entering a CVA?
A CVA is a legally complex arrangement involving creditors, contracts, directors’ duties, and regulatory obligations.
Seeking advice from specialist insolvency solicitors can help ensure:
- The arrangement is legally robust
- Directors understand their obligations
- Creditor negotiations are properly managed
- Commercial contracts are reviewed
- Risks are identified and mitigated at an early stage
At Blake Turner Solicitors, our London-based insolvency team regularly advises directors, shareholders, and businesses on CVAs and wider corporate restructuring matters.
Frequently asked questions about Creditors Voluntary Arrangements
Do I need a solicitor for a Creditors Voluntary Arrangement?
Whilst insolvency practitioners oversee the insolvency aspects of a CVA, solicitors play an important role in advising on contracts, creditor disputes, directors’ duties, and legal risks. Professional legal advice can help ensure the process is handled correctly.
Can my business keep trading during a CVA?
Yes. One of the primary benefits of a CVA is that the company can continue trading whilst repaying creditors under the agreed arrangement.
Are all creditors bound by a CVA?
Approved CVAs generally bind unsecured creditors, including those who voted against the proposal. However, secured creditors are usually not bound by the arrangement.
Will a CVA stop creditors taking action immediately?
Not necessarily. Unlike administration, a CVA does not typically provide immediate protection from creditor enforcement while the proposal is being considered.
How long does a CVA last?
Most CVAs run for several years, with repayments made over an agreed period depending on the company’s financial circumstances.
Is a CVA better than liquidation?
Every situation is different. A CVA may be suitable where the underlying business is viable and can continue trading successfully. Where financial difficulties are more severe, alternative insolvency procedures may need to be considered.
Speak to our CVA Solicitors in London
If your company is experiencing financial difficulties and you are considering a Creditors Voluntary Arrangement, obtaining early legal advice can make a significant difference to the outcome.
At Blake Turner Solicitors, our specialist London insolvency solicitors advise directors and business owners on CVAs, corporate restructuring, administration, and insolvency-related matters.
We work closely with insolvency practitioners to help businesses understand their options and achieve the best possible outcome during challenging circumstances.