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.
Related Terms
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
- Insolvency Act 1986 (UK)
- The Insolvency Service (UK Government)
- R3 - Association of Business Recovery Professionals
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