As mentioned above, a CVA is a business turnaround tool rather than a terminal insolvency procedure. A company voluntary arrangement is an insolvency procedure providing a contractual arrangement between your business and creditors to pay back what you can afford, based on your business cash flow. However, like all insolvency procedures, there are benefits and consequences. Our guide to the company voluntary arrangement will take you through the process. You can read more information on the timeline of the procedure here.
While liquidation and administration remove a company director’s powers, you are still entitled to keep control of your company with the CVA procedure. Liquidators and administrators are assigned to recoup as much as possible for creditors, removing your position of power and selling company assets. A CVA allows you to control the business recovery plan and carry out the company voluntary arrangement obligations. You will still have to comply with the terms of the CVA proposal, but you continue to oversee the day-to-day running of the company.
Creditor pressure is one of the most significant signs of financial difficulty, but entering a CVA protects your company from said creditor pressure. A licensed insolvency practitioner will assist your company with the CVA proposal and once the CVA is approved, creditors bound by the proposal cannot take further legal action. For companies that have a viable chance for recovery, this could post the most significant opportunity, as long as you comply with the CVA proposal. Your company cannot be wound up during once the CVA is in place unless you incur further credit or fail to comply with the terms. However, if a winding up petition has been submitted, a CVA could be a better alternative to liquidation for the creditors.
It will often be the case that if your company enters liquidation there will be insufficient assets to repay any monies to creditors. However, a CVA, when compared to liquidation offers a better return to the creditors. While they still may not receive all monies owed, they can recover more than in winding up. It is in their best interests for your company to succeed and the CVA process can even improve your business cash flow - thus meaning you can recover more for the creditors in the future.
Speaking of liquidation, the consequences for your company are severe. A company voluntary arrangement allows your creditors to receive payment in installments, and keeps you in control. Liquidation will almost certainly result in a full loss of control as well as your company being completely closed down.
The CVA procedure may result in difficulties for the company in obtaining credit, but it’s far less damaging for your company reputation than liquidation. If your company were to enter administration, a notice will be placed in The Gazette alerting all interested parties to the insolvency. In doing so, your customers may see this and lose faith in your company, causing further financial problems. However, a CVA is only published at companies house and to creditors, giving your company the time to recover and make the necessary restructuring changes.
While the advantages of a company voluntary arrangement outweigh various other insolvency procedures, there are disadvantages to consider.
Accessing credit from banks and suppliers will become extremely difficult to do, which may have an adverse effect on your ability to trade moving forward with suppliers requiring payment on cash terms. However, this is the trade off against not being able to trade at all in the instance of your company being wound up. Unfortunately if some suppliers are included in the CVA, they may refuse to work with you moving forward and you will need to find an alternative. This can be a very difficult situation where specialised goods or services are provided.
Signing up to a CVA is a serious financial commitment as they usually last for 5 years. Failure will often result in the Supervisor of the CVA being forced to wind up the company either with your cooperation or through the courts by way of a winding up petition putting you back to square one. For the CVA to be viable there must be a material change in the trade of the business and you must be able to demonstrate it is the burden of historic debts holding it back, not that it is not currently turning a profit. If the latter is the case it may be more prudent to consider creditors voluntary liquidation.
In the corporate insolvency market, CVAs account for only around 2.5% of all insolvencies. Liquidation and administration are more common and a company voluntary arrangement may not be viable. A licensed insolvency practitioner will check to see if it is an option and work on a proposal with you. The creditors would then vote on the proposal and 75%, or over, must consent for the CVA to be accepted. For more information, we have outlined what makes a successful CVA.
Our business rescue experts can provide advice and aid in obtaining a CVA. You can get in touch with our insolvency practitioners via the contact form.