Company voluntary arrangements (CVAs) explained

A company voluntary arrangement, usually shortened to CVA, is a way for a viable but insolvent limited company to pay its creditors over a fixed period. GOV.UK says it allows the directors to keep control of the company while it continues to trade.

It is a formal insolvency procedure, which means it is set out in law and run by a licensed professional. It is different from agreeing a payment plan with one supplier by email. Once it is approved, the terms bind creditors who did not agree to them.

A CVA is for companies. If you are a sole trader or self-employed, the equivalent is an individual voluntary arrangement, which is a separate process. This guide covers the position in England and Wales: the legislation it relies on extends to England, Wales and Scotland, and Northern Ireland has its own insolvency rules, so take local advice there.

A CVA works by the directors appointing an insolvency practitioner, who drafts a proposal, puts it to creditors and then supervises the payments. The board of directors must support the decision before anything starts.

1. The directors agree to proceed and appoint an insolvency practitioner. GOV.UK says the practitioner charges for setting up the CVA and for administering it.
2. The practitioner works out how much debt the company can repay and a payment schedule. GOV.UK says they must do this within a month of being appointed.
3. Notice of the proposal goes to all creditors, and shareholders are invited to vote on it.
4. Creditors vote. If the CVA is approved, it takes effect and the company makes the scheduled payments to creditors through the insolvency practitioner until they are paid off.

The Insolvency Service tells directors to take advice from an insolvency practitioner on whether a CVA is the right option at all. That advice is worth having early, before the position hardens. See our guide to company insolvency for the wider picture.

A CVA needs the approval of creditors holding at least 75% of the debt, by value, of those who vote on it. Shareholders also vote, on a simple majority, and if their result differs from the creditors’ result they may apply to court.

The second test matters because directors and related parties are often creditors too, for example through a loan to the company. The rules stop connected creditors from carrying the vote on their own.

If a CVA is approved, it is legally binding on all creditors entitled to vote, including those who voted against it. If it is not approved, other formal measures, including voluntary liquidation, may follow.

A CVA cannot take away a secured creditor’s right to enforce its security without that creditor’s agreement. The Insolvency Act 1986 also stops a CVA from changing the order in which preferential debts are paid unless the creditor concerned agrees.

In practice, a lender holding a charge over the company’s assets, such as a debenture, keeps its security unless it concurs with the proposal. HMRC debts such as VAT and PAYE rank ahead of other unsecured debts in an insolvency, so a proposal cannot simply push them down the queue.

A CVA is the option that lets the existing directors keep control of the company and keep it trading, while administration and liquidation move control to a practitioner. Which one fits depends on whether the business is viable, and only an insolvency practitioner can advise on that.

The options are not always separate. GOV.UK notes that an administrator may negotiate a CVA as one way to let the company keep trading. A company that cannot agree a CVA may also face voluntary liquidation instead.

If the company does not meet the agreed payment schedule, any of its creditors can apply to wind it up. That is the key risk of a CVA, and it is why the repayments must be realistic before the proposal goes out.

The proposal is only as good as the forecast behind it. A practitioner will test whether the business can fund the repayments and still pay its ongoing costs, and a well-built cash flow forecast is where that work starts. If a creditor is already pursuing the company, read our guide to a winding-up petition as well.

Yes. Under section 6 of the Insolvency Act 1986, a creditor, shareholder or other qualifying person can apply to court on two grounds: that the arrangement unfairly prejudices their interests, or that there was a material irregularity in the vote.

There is a short time limit, set by the Act as 28 days from when the required reports on the vote are made to the court. A challenge is a legal process in its own right, so a solicitor or insolvency practitioner should advise anyone considering one.

Directors should know that their duties change once the company is insolvent, and that they should take advice early. GOV.UK says directors’ priorities shift from the shareholders to the creditors: protect the company’s assets, treat all creditors the same and avoid making creditors’ position worse.

• Directors are not normally personally responsible for company debts, but mismanagement can change that. GOV.UK lists wrongful trading, fraudulent trading and misfeasance among the grounds.
• Wrongful trading arises where a director knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation or administration. A director who took every step to minimise creditors’ losses has a defence.
• A personal guarantee a director has given on a company loan is a separate agreement between that director and the lender. Read our guide to personal guarantees and ask your adviser how it is affected.

Any lender decides case by case, and a company in a formal insolvency procedure is a very different credit proposition from a healthy one. Some government-backed schemes rule it out directly: the Growth Guarantee Scheme, for example, requires that the borrower is not in relevant insolvency proceedings.

That is why the time to look at funding is usually before a company reaches this point. Lenders, as set out in our business lenders directory, look at trading history, cash flow and existing debt, and an existing arrangement with creditors is part of that picture.

Capzy is a credit broker, not a lender, and is paid by the lender. We do not arrange CVAs or give insolvency advice, and we cannot say whether a CVA is right for your company: that is a job for a licensed insolvency practitioner.

If your business is under pressure but not yet insolvent, you can check your funding options with a soft search that does not affect your credit score. Any offer from a lender is subject to status and lender criteria, and borrowing to cover losses only postpones the problem.