Creditors Voluntary Agreement: What it is and How it Works
A Creditors Voluntary Agreement (CVA) is a legal agreement between a company that is insolvent and its creditors, which allows the company to pay off its debts over a set period of time. It is a formal agreement between the company and its creditors, which is supervised and approved by an insolvency practitioner.
When a company is facing financial distress and is unable to pay off its debts, it can opt for a CVA as an alternative to bankruptcy. The CVA provides a way for the company to negotiate with its creditors and avoid liquidation. Instead of closing down the business, the company is able to continue trading while paying off its debts in an affordable manner.
The CVA process begins with the appointment of an insolvency practitioner who will review the company’s financial position and prepare a proposal for the creditors. This proposal outlines how the company will pay off its debts over a set period, usually between three to five years. The proposal must be approved by at least 75% of the company’s creditors, by value of debt owed.
Once the proposal is approved, the company must adhere to the terms of the CVA. This includes making regular payments to the insolvency practitioner who will then distribute the funds to the creditors. The company must also provide regular updates on its financial performance to the insolvency practitioner.
During the term of the CVA, the company is protected from legal action by its creditors, as long as it maintains its payments and complies with the terms of the agreement. This means that the company can continue to trade and generate income, while paying off its debts at a manageable rate.
One potential drawback of a CVA is that it can be quite restrictive for the company, as it must operate within a strict budget and with limited resources. The company may also be required to divest certain assets or reduce its workforce to comply with the terms of the agreement.
However, overall, a CVA can be a positive solution for a company that is facing financial difficulties. It allows the company to stay in business and repay its debts in a manageable way, while avoiding bankruptcy and the associated negative consequences.
In conclusion, if your company is facing insolvency, a Creditors Voluntary Agreement may be a viable option to consider. However, it is important to work with an experienced insolvency practitioner to ensure that the proposal is realistic and achievable, and that the terms of the agreement are complied with.
