Why should I accept a Company Voluntary Agreement?

In many cases a CVA can represent a creditors best option for recovering the maximum possible of the debt owing.

Why should I accept a CVA?

Company Voluntary Agreements (CVAs) offer an important lifeline to those insolvent companies that still have good operational models but a weighed down by debt they can’t afford. To the insolvent directors a CVA will generally be universally attractive, with the few downsides being far outweighed by the many positives.

But what about the creditors of that company? Does a CVA offer value to them? Is it something that should be accepted and can it even be refused?

What is a CVA?

Before we begin, lets define what a CVA actually is. It is a function of insolvency proceedings where the insolvency practitioner comes to the conclusion that the business is still functional and viable but for its debts.

In this instance, the insolvency practitioner will approach the company’s unsecured creditors with what is essentially a debt restructuring and payment plan. The creditors must then approve the agreement under two conditions:

• 75% of the debt by value approve of the CVA
• No more than 50% of al creditors (regardless of value) have voted against it

Once it is approved the following come into place:

• All debts are frozen (no interest can be charged)
• The payment plan is legally binding
• Creditors can not follow debt recover procedures
• The company can continue to trade
• The directors retain control of the company

What does a CVA mean for creditors?

This arrangement is obviously advantageous for the debtor, but what does it mean for that company’s creditors?

The first thing to note is that a CVA is only binding to unsecured creditors, the debtor can still face debt recovery and legal actions from their secured creditors. This means that even if the debtor follows the CVA agreement to the letter and are experiencing favourable trading conditions, their secured debt load can still lead to insolvency. Especially as secured loans tend to be high value.

However, an insolvency practitioner will factor the secured debts of a company into their decision as to whether a CVA is an appropriate and viable option for an insolvent company.

Typically a CVA will restructure the company’s debts to be paid out over a longer timeframe (often between 3 to 5 years) and may involve the amount owing to creditors being reduced. Meaning that a CVA will do little to improve the short term cashflow of a creditor.

It also means that creditors lose the ability to chase the debtor for repayment as no debt recovery processes are allowed to be pursued.

Whilst a debtor must be insolvent to enter into a CVA, it is an alternative to insolvency proceedings and the investigation into the actions of the directors in the lead up to the insolvency that would usually take place does not. This means that any incompetence or illegality which may be key underlying causes of the business failure may not be uncovered.

What are the advantages of a CVA?

On the surface it may seem like only the insolvent debtor sees any real advantage from a CVA and debtors get a raw deal, with them having to wait longer for their money and even them potentially a lesser amount.

However, when faced with the decision to accept a CVA, debtors should understand it is an opportunity to avoid a negative (or more negative) outcome.

This is because should I the company be declared insolvent any unsecured debtors (which are the ones covered by a CVA) are unlikely to recover any meaningful amount of the money they are owed. This is because payments made to creditors in insolvency proceedings follow a strict hierarchy, of which unsecured creditors are at the bottom.

So a CVA represents a significantly better chance of recouping more money than should they refuse it and rely on insolvency proceedings.

Can I refuse a CVA?

All unsecured creditors are afforded the opportunity to vote on whether to accept a CVA with acceptance conditions being as stated previously in the article.

Protection for individual creditors once a CVA is accepted

Whilst a CVA dictates that creditors can not pursue debt recovery processes it is also a legally binding agreement. This means that is the debtor does not match the terms agreed then creditors can pursue legal action.

Should a CVA be accepted it is still possible for it to be challenged, though only in the first 28 days.

A creditor can challenge on two grounds:

• ‘Material irregularity’ – this is where a creditor can demonstrate there was an irregularity in how the CVA cam about, procedural or otherwise.
• ‘Unfair prejudice’ – this is where a creditor can demonstrate that a CVA unfairly favours one or some creditors over others.

How do I avoid insolvent clients?

The best way to avoid bad debts is to avoid dealing with uncreditworthy companies at all. At Red Flag Alert we have developed the UK’s most accurate insolvency score and provide detailed but easy to understand business reports on all UK businesses. Allowing you to effortlessly perform powerful financial due diligence before a deal is signed and build a financially strong and stable client book.

We also provide a fully customisable monitoring tool where you select which events are relevant to your business and receive convenient alerts directly to your inbox. So you can be secure in the knowledge that if any of your clients start to show signs of financial distress you will receive plenty of warning to chase your debts and refuse further credit.

Request a free trial find out more about how Red Flag Alert will let your business avoid bad debt and increase revenue.