CVAs offer a repayment proposal to creditors as an alternative to liquidation, when a company can no longer pay back its debts. The agreement gives the company breathing space while it addresses the issues that have caused its financial difficulties. Either the full amount of what is owed, or a proportion of it, is ‘ring-fenced’, to be paid back within an agreed time frame, while the remainder (if any) continues to be repaid under the normal terms.

Joanne Wright, a partner at recovery firm Begbies Traynor, warns: ‘CVAs work only if the company is inherently profitable and it can point to a single reason that has caused the problem when it comes to paying back creditors.’

For a CVA to be put in place, 75 per cent of creditors (by value) will need to vote in favour of the proposal. Tom MacLennan, chief executive of Tenon Recovery, says that securing such approval is not always easy.

‘It tends to be a combination of negotiation and poker. Directors will put forward a proposal and then the creditors negotiate a better one, either by increasing dividends or tightening payment terms,’ says MacLennan.

In order to win creditors round, the company will need to produce a viable proposition, historical accounts, forecasts for cash flow, profit and loss and a good explanation about what’s gone wrong. Once agreed, the terms can later be changed – as long as 50 per cent of creditors agree.

Companies will also be required to make structural changes, involving major cost-cutting drives such as salary reductions and redundancies.

MacLennan adds that in the current environment, creditors are becoming more amenable to proposals. ‘There is more willingness now than in the last ten years, as creditors previously thought they could easily find another company to replace the loss in turnover,’ he says.

However, Ian Boden-Smyth, a spokesperson from the Insolvency Helpline, warns that CVAs tend to have a low success rate. ‘There’s often an expectation gap, with creditors not fully understanding what CVAs are. They are not a magic wand, they’re only going to work if the company in question has a full order book of at least one to two years. Long-term contracts are the best route out.’

Boden-Smyth also advises that companies do their groundwork before forking out on an insolvency practitioner: ‘Meet every creditor beforehand and tell them what’s going on, and find out whether they are on your side. As a creditor, there’s nothing worse than receiving a letter out of the blue that has the word “insolvency” on it.’

See also: Insolvency – Advice for companies in trouble