No company director wants to think about insolvency, as almost without exception they set-up a business to be profitable.

The risk remains, however, that a director may have personal liability in the event the company fails. It is therefore important for a director to take a close look at the viability of the business.

So let’s just assume for arguments sake that you are a director of a company and things are getting a little difficult; just what are your options?

Many advisors are aware of the administration and liquidation process – insolvency procedures that bring the trading of a business to an end.

A ‘new-co’ can potentially emerge, ‘phoenix-like’, from the ashes, but it can be a challenge to obtain credit from the same suppliers who have been greatly affected by the preceding insolvency. Add to that, the problem of funding new-starter businesses and the prospect running that ‘bar in warmer climates’ or other lifestyle options becomes all too welcoming.

A great potential solution for a company’s cashflow problem is called a Company Voluntary Agreement (CVA), however, recently it has fallen into disrepute through misuse and poor reputation.

What is a CVA?

A CVA is a legally binding agreement made between a company and its creditors; unsecured, trade and tax, which ‘ring-fences’ old creditor liabilities and allows a company to move forward.

This does not mean that the old creditors are written off in full, but depending on what is agreed with the creditors, a substantial portion of the old debt may be written off. More importantly, a timetable is agreed to pay the balance which does not starve the company of cash as it goes forward. Then the company can settle its new liabilities as and when they become due, and pay off the old liabilities or a proportion thereof out of future profits, in accordance with the proposal agreed in the CVA.

Although a CVA is a procedure recognised and ratified by UK insolvency law it can help by, for example:

  • Allowing a company to terminate expensive property and other leases
  • Terminate expensive director and employee contracts
  • Stop pressure from HMRC in the form of demands for payments of VAT and PAYE contributions
  • Terminate onerous customer and supplier contracts

The advantage for directors is that they remain in control, personal guarantees usually don’t get called in and the business is given an opportunity to survive and grow.

Historically, a CVA was thought of as a ‘no-go’ area for many companies due to high failure rates and the consequent perception that all CVA’s were doomed to failure.

Times are changing, however, and creditors are now more likely to approve CVA, which returns something to them, as opposed to the likelihood of nothing in an administration and/or liquidation.

The advantages of a CVA are:

  • Survival of the company
  • Higher returns to creditors
  • Interest is frozen on the debts
  • No director conduct investigation
  • Directors retain control of the company
  • Personal guarantees not called in (usually)
  • Terminate unwanted contracts
  • Renegotiate with landlords
  • Reduce manpower with no redundancy costs
  • Cheaper than administration
  • Stops legal action by irate creditors
  • Does not crystallise overdrawn directors loan accounts
  • New funding can be easier to raise in a CVA than post administration or liquidation

The toolbox for a successful CVA

  • The business must be viable following the surgery required to trim excess costs and must historically have had a track record of trading profitably
  • The deal with creditors must be appropriate and prudent. Making large payments too early can cause the business to run out of capital. Conversely, if you pay too little, creditors will not approve the proposal
  • An injection of working capital may be required to assist in restructuring and re-financing the business
  • New ideas will be necessary to achieve a turnaround as the old management may be exhausted from the battles and ravages of trying to save the company. Therefore, new blood or at least new ideas will almost certainly be necessary, to achieve the turnaround
  • Realistic forecast are very important. The usual hockey stick shaped forecast will not fool anyone, including the creditors who have to approve the proposal

If you feel you have a viable business that is struggling under burden of debt, a CVA can be a great solution. A CVA allows you to reduce creditor pressure, cut costs and restructure the business quickly and efficiently.

The CVR team are experts in proactive, professional CVA design. We will ensure that matters are handled properly allowing the business to have the best possible chance of survival.

For further information please contact your local office partner.