At the moment it seems like every time you turn on the TV or listen to the news there is another well known company announcing it is going in to a CVA. Prezzo, New Look and Carpet Right to name a few have all used or are using CVA’s to restructure their businesses in a bid to survive.
Many of us understand what is meant by insolvency or administration and what these ultimately mean for creditors but what is a CVA and how does it work?
A part of UK law since 1986, a Company Voluntary Arrangement (CVA) is essentially a legally binding agreement between the insolvent company and its creditors. The arrangement allows for a portion of its debt to be paid back over a period of time, usually between 3 and 5 years, and is in effect the equivalent of Chapter 11 in America. Implementing the proposal requires 75% of the creditors, by value, voting to support it.
Once the proposal has been approved, ALL creditors are bound by it. The deal puts a legal ring fence known as a moratorium around the company preventing creditors from pursuing actions such as winding up petitions. This gives the company time to seek alternate finance, restructure or sell.
When in CVA a company can;
- Continue trading as normal
- Terminate employment, property leases, onerous supply contracts with zero cash cost
- Not increase its liabilities to any of its creditors, new debt not contained by the ring fence, can be pursued by creditors, including legal action
Whilst a CVA is a process by which a business continues trading, a company entering a CVA is ultimately conducting an act of insolvency. Therefore registering a credit insurance claim is the same as it would be for administration or insolvency. Debts will be covered up to the point of the credit limit being removed or date notification is received advising the company is entering a Company Voluntary Arrangement. Suppliers wishing to continue trading are advised to seek a ‘salvage waiver’ from the insurer as this means any payment against invoices post CVA are not assigned to those raised prior to it. Trade would continue at the suppliers own risk. Only when a company has exited (positively) from a CVA and subsequently proved it is credit worthy will cover on credit be considered.
Credit insurance can provide a quick replacement of capital in the event of the Company Voluntary Arrangement or insolvency of a customer or supplier. If you would like to discuss how credit insurance could benefit your business, please contact Acumen Credit Insurance Brokers