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Company voluntary arrangements explained

Company voluntary arrangements (CVAs) appear to be becoming more popular with directors who wish to ride the storm with the existing business, believing that they are sufficiently profitable to enable payment of their historical debts providing they are given time to do so.

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Downturns in sales, rising overhead costs and reduced cash flow have all increased the popularity of company voluntary arrangements (CVAs) with directors who believe that their companies are sufficiently profitable to pay their debts providing they are given time to do so. What is a CVA? A CVA is a legally binding agreement between a company and its creditors to pay back as much as they can afford over a given period of time. It enables the business to continue to trade and the contributions can be made through ongoing profits introduced monthly or via a lump sum. Debts will also crystallise, meaning that no further interest is likely to be accrued. Main considerations The outcome for the creditors The proposal must ensure that what is being proposed is better than the alternative. The attitude of the creditors 75% of the unsecure creditors (by value) who vote in relation to the CVA need to accept the terms of the proposal in order for it to be deemed approved and therefore the views of the majority creditors must be carefully considered. Crown liabilities Although government legislation is intended to promote business rescue, HM Revenue & Customs may reject a CVA proposal on the grounds of a previous history of poor payment. Companies need to ensure that every effort has been made to seek repayment plans with HMRC, and that the Crown debt is not vastly disproportionate to other creditors. Fit, feasible and fair The CVA should represent a fair offer which is capable of being achieved and is fit to be proposed and considered. Benefits of a CVA The most important benefit of a CVA is that it is a formal method of business recovery, providing protection to the company and allowing businesses to continue, whilst enabling a better outcome for creditors. Another benefit of a CVA is that it is a way of buying time to either cut unprofitable areas of a company or to simply start seeing the benefits of rises in sales or increased spend in marketing. An added benefit available to directors when choosing a CVA is that less focus remains on them; limited investigations are undertaken and no report is submitted to the Insolvency Service on their conduct. This may of course be considered a disadvantage, particularly for creditors who feel that the actions of the directors should be examined in more detail. It is clear that a CVA can offer some invaluable benefits should any company ever be in the unfortunate position of impending insolvency. About the author F.A. Simms and Partners is a family owned business rescue and insolvency practice with over 30 years experience. Along with their partner company, wk5.com, they provide many of the benefits under our Finance Director business solution and our Credit Control Guide, which is available FREE to our members. Members: If you're trying to recover a debt, you can discuss your options by calling our debt recovery helpline on 0845 130 1722.

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