Definition
A Company Voluntary Arrangement (CVA) is a formal insolvency procedure whereby a company agrees to pay back its creditors a proportion of what it owes over a set period. This agreement is facilitated under the UK’s Insolvency Act 1986. The primary goal of a CVA is to allow a company to continue trading while repaying its debts without immediate liquidation.
Examples
- Retail Stores: A chain of retail stores enters a CVA to restructure its debts, allowing the stores to remain open and save jobs.
- Hospitality: A hotel chain agrees to marginally reduce its debt burden through a CVA, preventing assets from being sold off and maintaining operations.
- Manufacturing: A manufacturing company implements a CVA to address financial distress caused by market downturns, thereby stabilizing the business over the long term.
Frequently Asked Questions (FAQs)
What types of companies can enter into a CVA?
Any company facing financial distress can propose a CVA, regardless of its size or industry.
How is a CVA agreed upon?
A CVA is proposed by the company directors and must be approved by at least 75% (by value) of the creditors who vote on it.
How long does a CVA last?
The duration of a CVA is typically between three to five years, but the specific term is agreed upon during the proposal stage.
Can a CVA proposal be modified?
Yes, creditors can propose modifications to the CVA during discussions, and a final agreed version must be approved in a creditors’ meeting.
What happens if the company defaults on the CVA payments?
If the company fails to adhere to the payment schedule agreed upon in the CVA, creditors may apply for the company to be put into liquidation.
Voluntary Arrangement
A legally binding deal between a debtor (individual or company) and creditors, agreeing on a repayment plan to resolve the debt issues without resorting to legal actions like bankruptcy.
Insolvency
The state of being unable to pay debts owed, which can lead to formal insolvency proceedings like liquidation or administration.
Debt Restructuring
The process of reorganizing a company’s outstanding obligations to restore or enhance liquidity so that the business can continue operations.
Administration
A rescue mechanism for insolvent companies allowing them to continue trading while a plan is devised to pay creditors.
Online References and Resources
Suggested Books for Further Studies
- Corporate Insolvency Law: Perspectives and Principles by Vanessa Finch
- Principles of Corporate Insolvency Law by Roy Goode
- Debt Restructuring by Rodrigo Olivares-Caminal
Accounting Basics: “Company Voluntary Arrangement (CVA)” Fundamentals Quiz
### What is the primary objective of a Company Voluntary Arrangement (CVA)?
- [ ] To sell off company assets.
- [ ] To merge with another company.
- [x] To allow a company to continue trading while repaying its debts.
- [ ] To declare immediate liquidation.
> **Explanation:** The primary objective of a CVA is to allow a company to keep trading while repaying its debts under agreed terms, thereby avoiding immediate liquidation.
### Who needs to approve a CVA proposal?
- [ ] Shareholders only.
- [x] Creditors who are owed money by the company.
- [ ] The company's employees.
- [ ] The general public.
> **Explanation:** A CVA must be approved by at least 75% (by value) of the creditors who vote on the proposal to take effect.
### How long typically does a CVA last?
- [ ] 1-2 years
- [ ] 6-12 months
- [x] 3-5 years
- [ ] 10 years
> **Explanation:** The typical duration for a CVA arrangement lasts between three to five years.
### Which insolvency procedure allows a company to continue trading while a repayment plan is agreed upon?
- [x] Company Voluntary Arrangement (CVA)
- [ ] Immediate liquidation
- [ ] Bankruptcy filing
- [ ] Share buyback
> **Explanation:** A CVA is designed to help the company continue trading while agreeing with creditors on a structured repayment plan.
### What happens if a company fails to comply with the terms of a CVA?
- [ ] The CVA is automatically extended.
- [ ] It can propose a second CVA.
- [x] Creditors may apply for the company to be put into liquidation.
- [ ] Receives government aid.
> **Explanation:** If the company fails to make payments as agreed in the CVA, creditors may apply for the company to be put into liquidation.
### What legislative act governs the CVA process in the UK?
- [ ] Companies Act 2006
- [x] Insolvency Act 1986
- [ ] Bankruptcy Act 1994
- [ ] Corporate Governance Code 2018
> **Explanation:** The CVA process in the UK is governed by the Insolvency Act 1986.
### Who primarily proposes a CVA?
- [ ] Creditors
- [ ] The government
- [x] Company directors
- [ ] Employees
> **Explanation:** A CVA is generally proposed by the company's directors as a method for restructuring debt.
### Which type of creditor approval percentage is needed for a CVA?
- [ ] 50%
- [ ] 60%
- [ ] 70%
- [x] 75%
> **Explanation:** At least 75% (by value) of the creditors who vote on the proposal need to approve the CVA for it to be implemented.
### When can a CVA be proposed?
- [ ] Only during periods of high profitability.
- [ ] After liquidation has started.
- [x] When a company is facing financial difficulties.
- [ ] Any time regardless of company financial status.
> **Explanation:** A CVA is typically proposed by companies facing financial difficulties as a means to repay creditors and avoid liquidation.
### What type of companies can enter into a CVA?
- [ ] Only public limited companies
- [ ] Only multinational corporations
- [x] Any company facing financial distress
- [ ] Only tech startups
> **Explanation:** Any company, regardless of its size or industry, can enter into a CVA if it is facing financial distress.
