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Company Voluntary Arrangement – Friend or Foe
Company Voluntary Arrangements (CVA) are a misunderstood alley to companies in trouble.
Introduced in 1986, there has been a steady increase in their use as a way of rescheduling debt, avoiding insolvency and ensuring the survival of the business.
Rightly, CVAs came under some scrutiny and criticism in the mid 1990’s after being misused. The effects of a misapplied CVA are simply to prolong the life of a terminal business and invariably to increase the overall debt that goes down with the company.
When used correctly, a company voluntary arrangement is an incredibly powerful tool. The business can be totally in control. In its simplest form the effect of a CVA would be:
In its more complex form, a business proposing a CVA can
For such a strong, legally binding process, this business restructuring procedure is very simple. A proposal is drafted and creditors vote to accept or reject the proposals at a meeting. If accepted, the terms are binding on all creditors from the date of the meeting.
Although the law envisages the majority of CVA proposals are drafted by the directors of the company, in the main, an insolvency practitioner or turnaround specialist will assist in putting the proposals together.
The importance of using a CVA weathered and experienced insolvency practitioner (IP) is critical. You wouldn’t go to a divorce lawyer for a patent application! Although all IPs duties are the same (and they are licensed to assist and preside over a CVA) not all have years of experience at the cutting edge of term drafting and negotiation within the CVA arena.
Some of the most fundamental points to consider include:
Only once these questions have been answered would we recommend the proposal is drafted and put before creditors. After all, the market place is now a mature and experienced place in respect of debt re-scheduling. If a woolly proposal is put before them they will shoot it down – and rightly so.
So, my concise conclusion would be:
Creditors and business peers will love and support you if a realistic, well drafted CVA proposal is put together that works. They will hate you if you have got blue sky hope drafted into something that ends up costing them more money.
Libby Aird-Brown
Investment Partner
The MacDonald Partnership Plc
www.tmp.co.uk