Definition
Company Voluntary Arrangement (CVA)
A Company Voluntary Arrangement (CVA) is a legal process provided by the Insolvency Act 1986. It allows a financially troubled company to come to an agreement with its creditors on the repayment of its debts. The CVA aims to manage the company’s affairs to resolve financial difficulties without resorting to winding up (liquidation). This arrangement can be proposed by the company’s directors, an administrator, or a liquidator, and it must be approved by meetings of both the company and its creditors. Once sanctioned, the arrangement is binding on all parties and is supervised by an appointed insolvency practitioner.
Individual Voluntary Arrangement (IVA)
An Individual Voluntary Arrangement (IVA) is a similar agreement between a debtor and their creditors under the Insolvency Act 1986. The IVA involves either a scheme of arrangement or a composition. It can be proposed either before or after a bankruptcy order has been made. The terms of the IVA must be agreed upon at a meeting between the debtor and their creditors, and an insolvency practitioner oversees the process. If the debtor fails to comply with the terms of the IVA, bankruptcy proceedings may be initiated or resumed.
Examples
-
Small Business Using a CVA: A financially distressed small business specializing in manufacturing can utilize a CVA to pay off its debts over time while continuing operations. The directors propose the CVA, which gains approval from the creditors. The appointed insolvency practitioner supervises the debtor company, ensuring compliance with the terms.
-
Individual Choosing an IVA Over Bankruptcy: An individual with significant personal debt, such as credit card debt and personal loans, can opt for an IVA instead of filing for bankruptcy. The debtor proposes a repayment plan to creditors, which gets approved in a meeting. The insolvency practitioner ensures that payment terms are met over the agreed period, providing the debtor with relief from bankruptcy.
Frequently Asked Questions
What are the primary benefits of a CVA?
- Avoidance of Liquidation: The company continues trading and avoids winding-up procedures.
- Controlled Repayment Plan: Debts are paid over a manageable period.
- Creditor Confidence: Provides reassurance to creditors regarding the recovery of their debts.
How does an IVA benefit an individual compared to bankruptcy?
- Avoidance of Stigma: An IVA is less stigmatizing than bankruptcy.
- Debt Repayment Over Time: Allows a structured repayment plan that fits the individual’s financial capabilities.
- Asset Retention: Enables individuals to keep essential assets.
What happens if a CVA fails?
- Legal Consequences: Creditor actions may resume, potentially leading to liquidation.
- Further Financial Trouble: The company’s efforts to manage its debts may be set back.
Can a company voluntarily propose a CVA?
- Yes, the directors of the company, an administrator, or a liquidator can propose a CVA to the creditors.
What does an insolvency practitioner do in a CVA/IVA?
- Supervision: Ensures compliance with the terms.
- Mediation: Acts as a mediator between the debtor and creditors.
- Administration: Manages the distribution of repayments.
Related Terms
Bankruptcy
A legal procedure wherein an individual or business declares inability to repay their outstanding debts, often resulting in liquidation and distribution of assets to creditors.
Liquidation
The process of winding up a company by converting its assets into cash to pay off creditors. This can be voluntary or compulsory.
Scheme of Arrangement
A court-approved agreement between a debtor and creditors for the restructuring of debt repayments.
Composition
An agreement where creditors accept a reduced amount in full satisfaction of the outstanding debt.
Insolvency Practitioner
A licensed professional who is authorized to act on behalf of a company or individual in insolvency processes, such as a CVA or IVA.
Online References
Suggested Books for Further Studies
- “Company Voluntary Arrangements and Administrations” by Geoffrey L. Bouchier
- “The Law of Individual Voluntary Arrangements” by Alaric Watson
- “Insolvency Law: Corporate and Personal” by Professor Andrew Keay
Accounting Basics: Voluntary Arrangement Fundamentals Quiz
Thank you for exploring the intricacies of Voluntary Arrangements through our comprehensive lexicon entry and challenging quizzes. Continue your pursuit of financial expertise for long-term success!
