Creditors’ Voluntary Arrangements (CVAs)
Creditors Voluntary Arrangements (CVAs) are entered into by companies that are facing financial difficulties. Rather than being a more formal process such as an appointment of an administrator or liquidator, the directors remain in charge of the business (albeit under the supervision of an insolvency practitioner).
The disadvantages of a CVA are that the company has to write to its creditors to propose the arrangements, but generally does not receive any protection from creditors whilst doing so. Therefore, there is always a risk (which is not present in administration, for example), that landlords will re-enter and forfeit leases, or other creditors will take enforcement action against the company. Also, secured lenders (such as banks with debentures over a company) are not bound by a CVA and can therefore can act as they see fit depending on the terms of their security.
Therefore, whilst creditors’ voluntary arrangements (CVAs) are often considered by owners and directors of companies that have assets worth preserving, they typically opt to enter administration instead, not least because of the possibility of a pre-pack sale of the business to preserve its value and the employment contracts.
A creditors’ voluntary arrangement (CVA) is a proposal to creditors to accept less money than they are actually owed, and to pay that lower sum back in instalments whilst continuing to trade, often over several years. An insolvency practitioner will be heavily involved in drafting those proposals and is often assisted by a solicitor to deal with contracts and points of law. Once a certain percentage of creditors agree the proposals, they bind all of them (save secured creditors).
Whilst the burden of paying that (albeit reduced) historic debt back over several years can weigh down on a business (unlike in administration), the creditors voluntary arrangement (CVA) process does preserve the business and can sometimes be successful if carefully planned.