What is a CVA in Business Terms?

With so many acronyms and initialisms floating around, you may well wonder to yourself, ‘what is a CVA in business terms?’

In truth, there’s a handful of different answers to that, but in general, most will be referring to a company voluntary agreement. This is the CVA meaning most commonly used, though some may refer to it as a creditors’ voluntary arrangement instead. This merely describes the same type of agreement, but from a different perspective (that of a company’s creditors).

 

What is a CVA or company voluntary arrangement?

A CVA is a formal agreement between a company and its creditors that allows the business to repay debts over a fixed period while continuing its operations. This simple guide aims to provide you with an understanding of CVAs, including the legal framework, advantages, and limitations.

Company Voluntary Arrangements (CVAs) have become an increasingly popular option for struggling UK businesses to navigate financial difficulties while avoiding having to close the company. Through a CVA, businesses are often able to consolidate all of their creditor debts into one monthly payment, leaving directors free to carrying on trading without pressure from individual creditors.

 

 

Understanding the legal framework:

CVAs are governed by the Insolvency Act 1986 and involve the appointment of a licensed insolvency practitioner (IP) who acts as a supervisor.

The IP assists in formulating a proposal that outlines how the company plans to repay its creditors and may involve restructuring debt repayments, reducing creditor claims, or closing unprofitable divisions.

The plan will then be presented to the creditors. Once approved, the CVA binds all creditors, including those who voted against it.

 

Advantages of a CVA:

1. Business Continuity: One of the primary benefits of a CVA is that it allows the company to continue trading while repaying its debts. This provides an opportunity for the business to recover and return to profitability.

 

2. Reduced Debt Repayments: Through a CVA, a company can negotiate reduced debt repayments, typically over a three to five-year period. This relieves the financial burden, enabling the company to stabilise its cash flow and regain control of its finances.

 

3. Creditor Protection: Once a CVA is approved, creditors are bound by its terms. They are unable to take legal action or pursue the company for outstanding debts covered by the arrangement. This protection allows the business to focus on its recovery without the constant threat of legal action.

 

Limitations of a CVA:

1. Creditor Approval: For a CVA to be implemented, it must be approved by at least 75% of the creditors (in value) who vote on the proposal. If the majority of creditors reject the arrangement, alternative options may need to be explored.

 

2. Unsecured Creditor Treatment: While secured creditors, such as banks with fixed charges, are legally bound by a CVA, unsecured creditors can still pursue legal action against the company for their debts if they are unsatisfied with the terms of the arrangement.

 

3. Negative Impact on Credit Rating: Entering into a CVA will have an adverse effect on a company’s credit rating. This may make it more challenging to secure credit or enter into future business agreements.

 

What is a CVA in Business Terms?

 

 

Five clear ways to avoid a CVA:

1. Cash Flow Management: Effective cash flow management is crucial for businesses. Implementing robust financial controls, monitoring expenses, and maintaining healthy reserves can help prevent the accumulation of unsustainable debt.

 

2. Timely Professional Advice: Seeking professional advice from accountants or financial advisors at the first sign of financial distress can enable early intervention. Prompt action may help identify alternative solutions and prevent the need for a CVA.

 

3. Renegotiate Contracts: In challenging times, renegotiating contracts with suppliers, landlords, or creditors can provide temporary relief. Open communication and transparency regarding the company’s financial situation may lead to more favourable terms.

 

4. Explore Alternative Funding: Rather than relying solely on debt, businesses should consider exploring alternative funding options. This could involve equity investment, asset-based lending, or government grants to bolster cash flow and support growth.

 

5. Business Restructuring: Assessing the business structure and operations for inefficiencies or unprofitable divisions can help streamline operations and reduce costs. Taking proactive steps to adapt and evolve the business model can prevent financial strain and the need for a CVA.

 

Company Voluntary Arrangements (CVAs) offer a lifeline for UK businesses facing financial difficulties, allowing them to repay debts while continuing operations. However, CVAs come with limitations and should be considered carefully.

By implementing effective financial management practices, seeking timely professional advice, renegotiating contracts, exploring alternative funding options, and proactively restructuring the business, companies can reduce the risk of needing to resort to a CVA.

Remember, prevention is always better than a cure, and taking proactive measures can help businesses thrive in challenging times.

 

Feeling stuck and unsure what your options are?

Still need some more advice on CVAs? Give us a call today for free on 0800 975 0380 or book a free consultation