A CVA is a formal agreement between the company and its creditors, which enables the company to continue trading whilst making contributions to a Supervisor, who must be a Licensed Insolvency Practitioner and who is appointed by the creditors. When there are sufficient funds available, the Supervisor will make a distribution to the company’s creditors. A CVA is particularly useful where a company has experienced a one off problem such as a large bad debt and where the company is inherently profitable with positive cashflow.
In order for a CVA to work, the company of course needs protection from pressure from its creditors. The Insolvency Act 2000 introduced provisions with effect from 1 January 2003, which enable a ‘small company’ to obtain an automatic moratorium whilst the proposals of the company are put forward to the creditors. The effect of the moratorium is that it provides the company with protection from creditors taking enforcement action whilst the CVA proposals are considered.
Before 1 January 2003 companies had to first be placed into Administration in order to obtain protection from creditors, prior to presenting the proposals to their creditors and members. The additional costs of obtaining an Administration Order were often prohibitive, especially when dealing with owner managed companies.
Since 1 January 2003 companies have been able to obtain an automatic moratorium which is effective from the date that the company files certain documents with the court and lasts until the end of the day of the creditors meeting at which the proposals are considered.
Whilst it is for the company to draft the proposals for consideration by its creditors, it is usual for an Insolvency Practitioner to assist in the drafting of the proposal. Typically, a CVA proposal will provide for an arrangement to last between three and five years and the proposal may provide for creditors to receive payment in full over the specified period or, for there to be a part payment of the debts over the specified period with the remainder of the debts being written off.
In order for the proposals to be passed, they have to be approved by both the creditors and members of the company, and in each case a 75% majority of creditors or members attending the respective meetings are required in order for the proposals to be accepted. If the required approval is obtained, the arrangement will then be binding upon any creditor who voted against the proposal and any creditor who did not attend the meeting either in person or by proxy.
The use of the CVA procedure should enable the company to continue trading and in addition the directors of the company will retain the day to day control of the business.
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