A company voluntary arrangement (CVA) is a binding deal between an insolvent company and its unsecured creditors, under Part I of the Insolvency Act 1986, to repay all or part of its debts over a fixed period while the directors stay in control and the business keeps trading. It is approved if at least 75% by value of the creditors who vote are in favour, unless more than half by value of the unconnected creditors vote against. Once approved it binds every creditor who was entitled to vote, including those who voted no. A licensed insolvency practitioner must act as nominee and then as supervisor.
When a CVA makes sense
The Insolvency Service describes a CVA as a way for a viable but insolvent company to pay its creditors over a fixed period. Both halves matter. The company must be insolvent, or close to it, or creditors have no reason to accept less than they are owed. It must also be viable, because creditors are being asked to rely on future trading profits rather than a sale of the assets.
Typical candidates are businesses with a sound core and a debt problem that came from one place: an old tax liability, a failed contract, a run of onerous property leases or debts left over from the pandemic. A business that loses money every month will not be saved by a CVA, because the arrangement only deals with the debts that already exist.
How a CVA works, step by step
- Advice and proposal. The directors, with an insolvency practitioner, draw up a proposal setting out what will be paid, over what period and from what source. The board must support it;
- Nominee's report. The insolvency practitioner acts as nominee. Within 28 days of receiving notice of the proposal, or longer if the court allows, they report to the court on whether the proposal has a reasonable prospect of being approved and implemented;
- Creditor and member decisions. Creditors vote through a decision procedure and the shareholders vote separately. If the two results differ, the creditors' decision takes effect, although a member can apply to court within 28 days;
- Challenge window. A creditor or member can apply to court on the grounds of unfair prejudice or material irregularity, normally within 28 days of the result being reported to the court;
- Supervision. The nominee becomes the supervisor, collects the agreed contributions and pays dividends to creditors until the arrangement is completed or fails.
The voting rules, with an example
Two tests apply under rule 15.34 of the Insolvency (England and Wales) Rules 2016. First, three-quarters or more by value of the creditors responding must vote in favour. Second, the proposal fails if more than half of the total value of the unconnected creditors vote against it. A creditor is treated as unconnected unless the convener decides otherwise.
Worked example. Brightline Ltd owes £1,000,000 of unsecured debt. £700,000 is owed to its parent company, which is connected. The remaining £300,000 is owed to trade suppliers and HMRC, all unconnected.
| Creditor group | For | Against |
|---|---|---|
| Parent company (connected) | £700,000 | £0 |
| Unconnected creditors | £140,000 | £160,000 |
| Total | £840,000 (84%) | £160,000 |
The first test is met, with 84% in favour. The second fails: £160,000 is 53% of the £300,000 owed to unconnected creditors. The CVA is not approved. The rule stops a friendly group creditor forcing a deal on outside creditors.
What a CVA cannot do
- Override secured creditors. A CVA cannot affect a secured creditor's right to enforce its security without that creditor's agreement, so the bank holding a debenture must normally be on side;
- Reorder preferential debts. Preferential debts must be paid in priority to ordinary unsecured debts unless the preferential creditor agrees. Since 1 December 2020 this includes HMRC's secondary preferential claim for VAT and for tax deducted from others, such as PAYE income tax, employees' National Insurance, CIS deductions and student loan repayments;
- Stop creditors acting before approval. A CVA on its own gives no protection while the proposal is prepared. If a creditor is threatening a winding-up petition, the directors may need a moratorium or another procedure first.
Protection while the proposal is prepared
Part A1 of the Insolvency Act 1986, added by the Corporate Insolvency and Governance Act 2020, gives eligible companies a standalone moratorium. A licensed insolvency practitioner acts as monitor. The initial period is 20 business days. After the first 15 business days the directors can extend it by a further 20 business days without creditor consent, provided the monitor considers rescue likely and all moratorium debts, and pre-moratorium debts without a payment holiday, that have fallen due have been paid. A company already facing a winding-up petition cannot obtain one simply by filing papers at court.
Tax and accounting consequences
Debt written off in a CVA is not normally taxable profit. Section 94 of the Corporation Tax Act 2009 taxes a released trade debt as a receipt, but only where the release is not part of a statutory insolvency arrangement, and a CVA is one. Section 322 gives the same result for loans released in a CVA. Without that relief a company could face a corporation tax bill on the very write-off that rescued it.
The accounts must still reflect the arrangement. Directors should expect their auditors, where the company has one, to examine going concern closely.
CVA or something else?
- HMRC time to pay. If the problem is only a tax debt, an informal time to pay arrangement may be enough and costs less;
- Restructuring plan. Under Part 26A of the Companies Act 2006 a court can sanction a plan approved by 75% in value of each class voting, and in some cases impose it on a dissenting class. Unlike a CVA, every plan needs the court's sanction;
- Administration or liquidation. If the business is not viable, these procedures are more realistic. See our guide to what insolvency means.
Acting early matters. Directors who keep trading when they should have known insolvent liquidation could not be avoided risk personal liability, explained in our guide to wrongful trading.
Sources: Part I of the Insolvency Act 1986, sections A9 and A10, rule 15.34 of the Insolvency (England and Wales) Rules 2016, the Insolvency Service's director information hub on CVAs and section 94 of the Corporation Tax Act 2009.
Before a CVA is proposed, creditors and the insolvency practitioner will want reliable forecasts that show the contributions can be paid. Our financial modelling team builds those forecasts, and our business health check can show whether a turnaround is realistic before you commit to one.