Definition of Company Voluntary Arrangement (CVA)
A Company Voluntary Arrangement (CVA) is an insolvency procedure in the United Kingdom that allows a financially troubled company to reach a binding agreement with its creditors about repayment of all, or part, of its debts over an agreed period of time. The main objective of a CVA is to provide an alternative to liquidation, thereby helping the company to survive and trade effectively while dealing with its debt obligations.
Examples
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Example 1: Retail Chain Recovery
- A struggling retail chain negotiates a CVA with its landlords and creditors. By doing so, it agrees to reduced rental payments over a five-year period. As a result, the company can reorganize its operations and avoid going into administration or liquidation.
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Example 2: Hospitality Sector Adjustment
- A restaurant group impacted by an economic downturn agrees to a CVA with its creditors to restructure its debts. This involves an arrangement to pay back 70% of its outstanding debt over a three-year period while remaining operational. The agreement ensures that the creditors receive part of the owed money, and the business is given a chance to recover.
Frequently Asked Questions
What is a Company Voluntary Arrangement (CVA)?
A CVA is a formal agreement between a company and its creditors, approved by a court, that allows the company to pay off its debts over a specified period without the immediate threat of liquidation.
Who can propose a CVA?
A CVA can be proposed by the company’s directors, its insolvency practitioners, or, in some cases, by its administrators.
How is a CVA approved?
For a CVA to be approved, it needs to be accepted by creditors holding more than 75% of the debt (by value) that participates in the vote and agreed upon by the court.
Can a CVA be challenged?
Yes, a CVA can be legally challenged within 28 days of being approved, usually on the grounds that it unfairly prejudices the interests of a particular creditor or group of creditors or if there were procedural irregularities.
How do businesses benefit from a CVA?
A CVA allows businesses to continue trading while dealing with their debt problems, thus potentially avoiding liquidation. It also provides a structured approach to repaying creditors over time and can often result in creditors receiving more than they would in a liquidation scenario.
How does a CVA affect employees?
Employees may be retained as the company continues its operations, although the CVA may include measures affecting employment terms, such as salary adjustments or restructuring.
What happens if a company defaults on a CVA?
If a company defaults on the terms of its CVA, the arrangement can be terminated, which could lead to creditors pursuing liquidation or other insolvency proceedings against the company.
Related Terms
- Insolvency Practitioner (IP): A professional authorized to act in insolvency proceedings, including CVAs, administrations, and liquidations.
- Administration: A process wherein an external administrator attempts to rescue a financially distressed company.
- Liquidation: The process of winding up a company, selling off assets to pay creditors, and officially dissolving the company.
- Creditors’ Voluntary Liquidation (CVL): A procedure initiated by a company that can no longer pay its debts and decides to wind up voluntarily.
- Pre-pack Administration: A form of administration where a company arranges to sell its assets to a buyer before appointing administrators.
Online Resources
Suggested Books for Further Studies
- “Corporate Financial Distress, Restructuring, and Bankruptcy: Analyze Leveraged Finance, Distressed Debt, and Bankruptcy” by Edward I. Altman
- “Principles of International Insolvency” by Ian F. Fletcher
- “Company Law in Practice” by The City Law School
- “Restructuring and Workouts: Strategies for Maximizing Value” by Edward I. Altman, Edith Hotchkiss, and Wei Wang
Accounting Basics: “Company Voluntary Arrangement” Fundamentals Quiz
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