Could a CVA provide a “Clean Break” with debt?
One new thing we’re going to do throughout 2021 is to use some of these enquiries as teachable examples and answer them publicly as well as we can.
Not only will it help demystify the sometimes opaque world of insolvency but it could also give you some food for thought if your business is going through something similar at the moment.
“Could a CVA provide a clean-break with past debt?”
We’re not going to use any actual names of figures in this scenario as it’s purely for our example but it’s probably going to be of interest to plenty of companies who might find themselves in a similar situation.
Business X is doing OK at the moment. It’s making enough money regularly to cover existing liabilities without excessive profits but it can’t move forward or invest because of a large historic debt.
This could be between five, six or seven figures and with no realistic way of paying it off in the near term, the company finds itself in a tactical and financial bind.
It can continue making token repayments, if any, without making any inroads into paying the debt figure down. This would also mean that it’s future growth prospects were severely limited, as would its ability to raise new finance or borrowing because of this constant liability.
So what are the options for a business in this situation?
We asked Chris Horner, Insolvency Director with Business Rescue Expert, for a professional opinion and possible solution to this seemingly intractable problem.
He said: “If a company is caught in a debt catch-22, where they can function on a day to day basis but can’t clear a large historic debt, then they could consider a Company Voluntary Arrangement (CVA) with a “clean break” ultimatum.
“A CVA is a good option for many companies struggling to function with crippling debt. What we mean by a “clean break” in this instance would be for them to make a lump sum offering to their creditors to clear the debt.
“This payment would be taken as full and final and would give the creditor a return, even if not the full amount owed, and would allow the company to move on and prosper in future. Usually this type of payment will come from a third party, be it the directors, shareholders or other funders.
“If this offer is rejected then the alternative for the company would generally be liquidation which would not only see the business closed down with the probable loss of jobs and future growth prospects.
“This would also be a bad outcome for the creditors too as the third party funds will not generally be available in the event the company goes into liquidation, resulting in a significantly reduced return, if any return at all.”
“If the offer is accepted then everybody gets something positive from the deal. If it’s rejected then it’s likely that everyone gets a negative outcome – and who wants that?”
What is a win-win scenario?
Whether it’s game theory, negotiation studies or conflict resolution – the premise is as simple as the actual outcome is as rare and complicated.
It’s an interaction from which all participants can profit in some way. Maybe not to the same degree, but ultimately there is a tangible benefit to be received.
The alternatives all see some kind of negative for one or more of the parties with the worst possible outcome, lose-lose, where everybody incurs a loss.
We don’t believe in lose-lose scenarios. We refuse to.
The whole basis of business restructure and rescue is to provide a positive future pathway for the company and their creditors to benefit from future wins.
Really It’s the only way to play.
We’ll arrange a free virtual consultation with one of our experienced expert advisors where we can see what you’re up against and plan your next winning move – together.