The Steps Involved in the CVA Process
CVA can only be used if a company is insolvent, which can be judged by the four tests included in the CVA Insolvency Act 1986. The usual test implies that the company has liquidity problems. Although the proposed payment period can be much shorter, it usually allows repayment over a period of three to five years. It can also be used to repay less than the amount due, ie less than 100% of the debt, if that is all the society can afford. The application will be sent to the creditors of the Company together with an independent report on the application by bankruptcy practitioner who acts as a candidate.
A company in difficulty can use a CVA to reschedule its debt so that it can continue to act where it would have to stop trading without the CVA. In this sense, it can be used to rescue a company, rather close it to oblige creditors, even if a debt-related judgment cannot be met or a creditor has filed a resolution (WUP). The proposal must show creditors that the surviving business is viable, meaning it is profitable with a positive cash flow or adequate financing to trade. This can lead to significant restructuring, where the costs of terminating contracts such as leasing and employment can fall to the creditors.
In addition to the debt repayment terms, it also helps to provide information on restructuring and restructuring as well as a business plan so that creditors can assess the profitability of the surviving company. The proposals must be fair and must not discriminate against individuals or groups of creditors, including persons with special rights such as personal guarantees. These include trading suppliers, credit insurers, financial service providers, employees. Landlords and HM Revenue and Customs, which are often the key to the arrears of VAT and PAYE that many companies have built.
A CVA is proposed to the creditors by the directors of the company. The directors need a counsellor, usually a bankruptcy trustee or a business rescue consultant, to help them prepare the CVA proposals and to help creditors whose views are often sought during the drafting process. A CVA insolvency should only be used if the company’s directors are willing to be honest with themselves and to face the company’s position, preferably with the advice and guidance of a bankruptcy trustee or senior management consultant.
This is because the financial situation and viability of the business should first be judged by someone with turnaround experience who can challenge the directors and their assumptions about what to do. Plans must also be developed and implemented to rebuild and restructure the business to be both profitable and cash flow positive. A CVA can very quickly improve a company’s cash flow by eliminating onerous financial obligations and reducing the pressure on creditors.