CVA - Company Voluntary Arrangement
Also read: Business Turnaround | Trading Out | Refinancing
If a company is experiencing difficulties but is believed to have a viable future then a CVA is usually a good option. A CVA is a deal between a company and it's creditors, in which debts are agreed to be repaid from future profits or the selling of assets.
A CVA aims to preserve the company and rebuild sales and profits while repaying existing debts. The company's directors remain in control and attempt to keep the company alive.
Vital Components of a successful CVA are
- A viable business that can return to profitability.
- A commercially structured deal - do not pay too much too soon.
- Introduction of appropriate levels of working capital in addition to the restructuring of debt.
- The management accept that there has to be change in the company.
- Determination and hard work is essential
If a company has a viable future, the directors and management accept the need for change, are prepared to fight for its survival and the appropriate funding can be found, then a CVA is a very powerful tool. However it is harder than liquidating the business so it is essential to take appropriate advice from experienced turnaround advisors.
How the CVA process works:
A) The directors appoint advisors, turnaround practitioners or an insolvency practitioner (IP) to assist in the construction of the proposal. During this period the company should not materially increase or decrease debts to any creditor and the company should continue to run.
B) An important part of the process is reviewing the company, its people, markets and systems. Typically the CVA will include detailed financial forecasts to assist the creditors to make their decision to support the deal or not.
C) On completion of the draft proposal the directors review and refine the proposal. If the reports findings are appropriate, achievable and maximises creditors’ interests then it can move foward. If the report process s has highlighted weakness in the business then it is advisable to close the business.
D) On completion of the final draft it should be discussed with the company's’ secured creditors like the bank. A good draft proposal on how the company aims to repay the bank’s debts should be included in outline of the document. - If the bank sees a viable company then although they may not agree with the suggested secured debt structure they will usually negotiate with the directors and their advisors.
E) During this period current assets such as WIP and debtors are collected, turned into cash and liquidity often improves. This should be used to fund the difficult period between appointment of advisors or IP’s and filing the document at court.
F) Once filed at court (it is filed at court only to ensure that the proposal is ratified and carries a legal originating number) the proposal is distributed to all creditors. The court does not have an active part to play in this process but the CVA proposal sent to creditors must be a true signed copy of the document filed at court.
End of the CVA period?
Once the agreed period is completed and the supervisor has issued a completion certificate, then the company leaves the CVA state. Any remaining unsecured debts (where partial repayment was approved) are written off and the directors continue to run the business for the shareholders.
