What Is a Company Voluntary Arrangement and How Does It Work?

A Company Voluntary Arrangement, otherwise known as a CVA, is a special agreement made between an insolvent company and its creditors. Company Voluntary Arrangements are typically reserved for companies that have encountered temporary financial setbacks resulting from a single non-recurring factor, including proprietor illness, marketplace shifts, and a significantly bad debt. It is important for the company seeking a CVA to be able to clearly show that their normal business patterns have recommenced and that it will be capable of repaying its debtors over a certain period of time.

A Company Voluntary Arrangement can be seen as a rescue procedure used to prevent a company from going bankrupt as a result of an unfortunate and unforeseeable event or circumstance.  When a company is insolvent or trading losses, it’s not uncommon for the company’s accountants to push for a meeting with a licensed insolvency practitioner.  The insolvency practitioner will determine whether or not the company should consider a CVA.

It is the job of the licensed insolvency practitioner to estimate what the creditors would receive if the company was liquidated and its assets sold off.  If the licensed insolvency practitioner concludes that the CVA would lead to a better outcome to the creditors than liquidation, he or she will help the company’s director prepare a CVA proposal to send to the creditors. The licensed insolvency practitioner will include a document called a Nominee’s Report that highlights and explains the reasons he or she believes the CVA would be advantageous to the creditors. Both the CVA proposal and Nominee’s Report are sent out to the creditors along with a notice to convene a special meeting of shareholders and creditors after no less than 2 weeks.

At this point, a creditor’s meeting will be held for the purpose of considering the proposal. The proposal must be approved by at least 75% of the voting creditors in order for the CVA to be put into practice. The shareholders must also approve the action at which point the licensed insolvency practitioner will take over as the Supervisor of the CVA. As the Supervisor of the CVA, the licensed insolvency practitioner will collect monthly contributions and ensure that the proposals are properly put into practice. As long as the monthly contributions are made and the proposals followed, the Supervisor of the CVA will not interfere with regular operations of the business, leaving standard operations in the hands of the directors. Over the course of the CVA period, the Supervisor will pay the contributions to the creditors. The length of the entire process can vary from case to case, but as long as the contributions are paid and the proposals followed, the CVA will be concluded at the end of the CVA period and the company will be able to continue operations as before the problems arose.

It is important to note that a CVA is not always the right course of action. For companies experiencing recurring issues, there is a high failure rate for CVAs. Another major issue to consider is that a company with frozen debts will have considerable difficulty getting credit at the time. Receipts from customers can serve as an asset for pro forma payment to suppliers. It’s critical that a company is thoroughly evaluated to determine whether or not it is right for a CVA.

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