Early exit from CVAs can work for the business and its creditors

business recovery signpostA Company Voluntary Arrangement (CVA) is a mechanism for an insolvent business to continue trading by paying off its debts out of future profits over a period of time providing it has the consent of 75% of creditors.

Many CVAs are structured to run for a five-year period with monthly payments throughout that time.

Generally, they cannot be varied during the first 12 months, mainly due to a standard modification that is a condition for approval by HMRC’s Voluntary Arrangement Service (VAS).

However, there is scope for varying the original terms of a CVA by making a subsequent proposal to creditors for early termination after the initial 12 months. Like the original CVA this requires 75% approval of creditors but it can involve offering revised terms, such as less money now rather than that offered over 5 years.

If such a variation is likely to be approved by creditors the business and its shareholders will need to be in a position to raise a lump sum either by borrowing or by attracting further investors.

The benefits of an early exit from a CVA to the company 

The business will benefit from paying less money as a proportion of its debt with more being written off. The effect of this will have the additional benefit of a stronger balance sheet post CVA.

Early termination will also free the company from its monthly obligation and as a result improve its cash flow.

Once clear of the CVA it will be in a better position to pursue more aggressive fund-raising and growth strategies and will be able to resume paying dividends to shareholders.

The benefits of an early exit from a CVA to creditors are mainly that they will receive cash sooner, rather than waiting for a longer period and receiving their money in small increments. They also avoid the risk that the CVA might fail.

The question is why more businesses do not take advantage of the option for an early CVA exit. One possible explanation is that the Insolvency Practitioner (IP), who may have been an adviser prior to the CVA, becomes a supervisor representing creditors and therefore is no longer an adviser. Another may be that early termination stops the supervisor earning their fees.

We believe that IPs who take formal appointments such as acting as nominee and supervisor of a CVA should be independent throughout and therefore should not act as advisers to the company since they are required to represent the creditors. Furthermore, they should insist companies have independent advisers who are best placed to assist on matters such as considering options for the early termination of CVAs. In this way IPs can avoid a conflict of interest.

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