Advantages and Disadvantages of a CVA

Is a Company Voluntary Arrangement a suitable restructuring solution for my business?

A Company Voluntary Arrangement (CVA) provides a way for companies in distress to pay off their debts over a fixed period of time, and offers the opportunity to address issues surrounding management and operational systems that were not working.

As with all formal insolvency procedures, the support of professional advisors is paramount if the business is to move forward with confidence. Begbies Traynor are qualified to advise on such matters, from numerous offices across the country.

The advantages of a Company Voluntary Arrangement outweigh the disadvantages for many companies, so let us first take a look at the positive aspects of this insolvency process.

What are the advantages of a CVA?

Directors remain in control

Even if past results suggest that a change in operational style is needed, the fact that company control remains in the hands of existing directors can be a distinct advantage. They know the ‘ins and outs’ of the business which, when combined with professional guidance, affords the best chance of a successful company turnaround.

Lower costs

The costs of setting up a CVA, and ongoing management/administration of the agreement, are significantly less than those associated with other insolvency procedures, including receivership and liquidation. There is no requirement for a cash lump sum to purchase business assets, as is the case with a pre-pack administration.

An upfront fee is payable to set up a creditors’ meeting, but much of the ongoing cost is deducted from the monthly repayment amounts agreed between the directors and their creditors. This has the effect of improving cash flow and increasing the amounts of working capital available.

CVAs are not as public as other insolvency processes

There is no requirement for businesses to tell customers about their Company Voluntary Arrangement. It does not have to be disclosed on company correspondence, and is essentially a private matter between the company and its creditors.

Legal action by creditors is stayed

Once a CVA has been agreed all legal action is stayed, which means that visits from bailiffs and winding up petitions cannot be instigated. If bank accounts have been frozen as a result of an advertised winding up petition, a Validation Order may be obtained that allows accounts to be reopened and trading to return to normal.

The support of secured creditors such as HMRC is vital to the success of a CVA. This means that the agreement needs to be carefully considered and structured to ensure the best chance of their vote.

Begbies Traynor has a long history of successfully negotiating and administering CVAs. We are available for appointment as Administrators.

No more repayment demands

Constant demands for payment are draining, especially when multiple creditors relentlessly pursue their debts. Part of the CVA process involves holding a creditors’ meeting, at which time creditors vote on whether to accept the terms of the CVA.

Once accepted, creditors are prevented from threatening or taking legal action against the company as long as the agreed terms are adhered to. Interest and charges are generally frozen, making the overall debt more manageable.

No investigation into directors’ conduct

A CVA avoids company liquidation and, therefore, requires no investigation of directors’ conduct leading up to insolvency. Any accusations of wrongful trading or improper practices are avoided, and directors can focus on turning the company around.

No calling-in of overdrawn directors’ current accounts

If directors’ current accounts are overdrawn, repayments can be made over a period of time – potentially by offsetting a proportion of salary to bring them back into line. This reduces the pressure on individual directors, and allows them to pay back what is owed at a reasonable rate.

As can be seen from the above, a Company Voluntary Arrangement can be a step forward for many companies facing insolvency. However, there are certain disadvantages that should be mentioned here in order to provide a balanced view of what is, in reality, a significant step.

DISADVANTAGES OF A CVA

The company’s credit rating is affected

A CVA adversely affects the company’s credit rating, making it harder to obtain credit from new suppliers, and potentially more difficult to renegotiate terms on existing contracts. As part of the overall debt will be written off in the agreement, this naturally has a negative effect and can make cash flow an issue for struggling companies.

Obtaining stakeholder and creditor acceptance can be difficult

A minimum of 50% of stakeholders and 75% of creditors (by value of debt) need to agree to the terms of the Company Voluntary Arrangement before it can be passed. Convincing both groups that a CVA is in their best interests is, therefore, paramount.

Begbies Traynor has a wide experience of managing successful CVAs and can help in this respect. If one large creditor holds a casting vote, it is all the more important to convince them that the CVA is ‘fit, fair and feasible’.

The agreement may run for a long period of time

The length of a CVA can be between three and five years. This may seem like a long time for some directors and stakeholders, who could resist on these grounds alone. Some cite pre-pack administration as an example of a better option, but this may not be the case.

Secured creditors are not bound by the agreement

The fact that the bank, for example, is not bound by the terms of a CVA leaves companies open to administrators being called in, even when the agreement is adhered to.

Failure of a CVA

If a CVA fails for some reason such as not keeping up with repayments, creditors can take legal action against the company. This is why it is important to make sure the terms of the agreement are feasible for the company in the long term, and that directors are not put under too much pressure to make higher payments than the company can afford.

A Company Voluntary Arrangement is an excellent way to turn around a struggling company and make it profitable again. Begbies Traynor can offer advice as to its suitability for your company.