With high street names such as Mothercare, New Look, Carpetright, and now Poundworld turning to rescue options, Company Voluntary Arrangements are big news at the moment. But what exactly are they?
What is a Company Voluntary Arrangement (CVA)?
Essentially a CVA is almost like a debt consolidation plan where not all the debt is repaid. This means a business can carry on trading whilst the plan is in place. It is worth pointing out that a CVA is a legally binding contract between your business and its creditors allowing you to repay part of the debts owed over time.
Your business can repay between 20% and 100% of its debt, depending on the arrangement, and a CVA usually lasts between 6 months and 1 year. CVAs can be the perfect solution some companies who are struggling with debt, but not all will be able to benefit.
A CVA has to be drawn up by a licensed Insolvency Practitioner and has to be agreed by 75% of the company’s creditors. They are being used in the retail market as they are able to get huge reductions in the amount of rent the shop has to pay (usually one of the larger outgoings). Landlords tend to agree to CVAs as the other options include liquidation, and if this happens the landlord is unlikely to see much at all.
Can you actually write off debt with a CVA?
Sort of. It is not possible to write off all the debt your business owes its creditors, but it is possible to write some of the debt off. Your company could benefit from a Company Voluntary Arrangement (CVA) if it owes a large amount out as it reduces the amount required to pay back to it’s creditors.
Types of businesses a CVA can assist with debt relief
Not all companies can prose a CVA to their creditors. For those that can, they still have to meet certain conditions. The conditions for your business to propose a company voluntary arrangement to its creditors include:
- Your business must be insolvent
- Your company must be commercially viable and capable of repaying debts over time
- Must be able to prove that a CVA is in the creditor’s best interest.
If your business is insolvent and you are certain a CVA is the right solution for debt relief, and can help improve cash flow in the future, then you should take action quickly before the situation worsens or another form of insolvency proceeding is needed.
Make sure your company can repay its outstanding debt
Even though a company voluntary arrangement can help your business write off a significant portion of its debt, it’s still mandatory that you work with your creditors to repay a considerable amount of the original debt your business owes.
Also, your business will need to provide evidence in its CVA proposal that it is liable and able to comply with any proposed repayment plan. Repayment plans usually last for six to twelve months, giving your company time to pay it’s debt.
The creditors will place more pressure on your business if you fail to comply with the terms stated in a CVA. Your creditors can serve your company a statutory demand and, if needed, also a winding-up petition upon non-payment.
Therefore, it is crucial that you plan the financial future of your business carefully before proposing a CVA to pay off the debt. A company voluntary arrangement provides debt relief only for a short-term, but it also entails a long-term obligation to repay debt.
How much debt can be written off by your business?
There are a variety of factors that can influence the amount of debt your business can write off with a CVA. These factors include your company’s cash flow, its liabilities, ability to repay debts, and the creditor’s demands in general.
Rick Smith, Managing Director of Forbes Burton