This briefing paper provides a detailed overview of the Company Voluntary Arrangement (CVA) procedure.Jump to full report >>
A Company Voluntary Arrangement (CVA) enables a viable company in financial difficulty to enter into a legally binding agreement with its unsecured creditors in which the company’s debts are compromised. However, it is important to note that a CVA is only one of a number of insolvency procedures designed to rescue a company in financial difficulty and avoid liquidation.
Under this procedure, the company’s directors, an administrator or a liquidator may make a proposal for a CVA which is then put before a meeting of creditors and shareholders for their approval. While an agreement is being pursued, the existing management stays in place. It is a relatively simple procedure with minimum court involvement.
There are a number of advantages to a CVA procedure, in particular, its flexibility. While a CVA must be administered by a licenced insolvency practitioner, it is not a requirement of a CVA that the company be insolvent, this means that action can be taken early at the first signs of distress. A CVA can stand alone or supplement other insolvency procedures, for example, administration. A CVA can even be proposed after a company has gone into liquidation.
It is fair to say that the potential benefit of a CVA differs according to the size of the company. Under current insolvency legislation, small companies in financial difficulty and proposing a CVA, have the option to apply to the Court for a moratorium (i.e. stop) order on creditor action while seeking agreement with their creditors to deal with their debts. Medium and large sized companies do not have this option. A ‘small’ company is defined by sections 382 of the Companies Act 2006 (as amended) as one which satisfies two or more of the following requirements:
The lack of any automatic moratorium is the main limitation of a CVA (few companies qualify as small companies for the moratorium) and although the Insolvency Service did consider extending the moratorium to larger companies, the moratorium has not been extended to date. As a result, CVAs are sometimes combined with administrations to benefit from the moratorium arising under administration.
This briefing paper provides a detailed overview of the CVA procedure. It also provides a summary of the changes that affect CVAs introduced by the Small Business, Enterprise and Employment Act 2015, which received Royal Assent on 26 March 2015.
Commons Briefing papers SN06944
Author: Lorraine Conway