If a company is insolvent, but the directors believe the company has a viable business, the directors could propose a CVA to the company’s creditors, whereby payment to creditors is delayed and/or compromised.

Such arrangements are particularly useful when a company is profitable, but suffers a one-off difficulty, such as a large bad debt.  A CVA can be used to allow the company to continue trading and to avoid liquidation.

Usually, the company continues trading under the control of the directors, whilst making contributions for up to 5 years to the Supervisor of the CVA.  The contributions will be distributed to creditors by the Supervisor.  If fully implemented, this procedure will result in a better outcome for the company’s creditors, compared to a liquidation.

In order to make a CVA more appealing to creditors and to improve the prospect of the CVA being approved, where applicable, related parties can agree to withdraw or defer their claims from the CVA, upon the approval of the CVA.  Alternatively, a third party contribution could be provided to increase the anticipated return to creditors.

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