What Are the Pros and Cons of a CVA?
A Company Voluntary Arrangement – or CVA – is an attractive solution to many struggling business owners, as it aims to achieve the successful turnaround of a company rather than see it go into closure.
However, CVAs do not function as a get-out-of-jail-free card for insolvent companies. There are a variety of positive and negative factors that should be kept in mind before pursuing the process.
So what are the advantages and disadvantages of a CVA? In this guide, we’ll explore all of the different factors.
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What Are the Advantages of a CVA?
Allows Directors to Retain Control
Most formal insolvency procedures, such as administrations or CVLs, require directors to give up control of their company and hand it over to the liquidator or administrator.
However, Company Voluntary Arrangements leave directors at the helm of the business. While you’ll have to comply with the terms of the agreement, you’ll remain in charge of the company’s day-to-day management.
Manageable Procedural Costs
CVAs are cheaper than other business turnaround procedures, with most of the procedural fees being deduced from the business’s monthly payments.
For example, pre-pack administrations require you to buy back your assets upfront, requiring large amounts of readily available cash.
This can make it a much more feasible turnaround process for insolvent companies, which typically don’t have spare working capital to meet large upfront payments.
Grants Relief from Creditor Pressure
Once your proposal has been accepted by your creditors, they’ll no longer be able to pursue legal action against you for your debts, so long as you continue to meet the terms of the CVA. For example, creditors will be unable to issue winding-up petitions against your business.
It should be noted that new creditors to the company (who come after the CVA) will not be bound and can still pursue action against you. Secured creditors will also be free to collect their securities.
It Is Mutually Beneficial for the Company and its Creditors
A CVA is founded on the grounds that it will be better for your creditors in the long run, granting them a better return than they would see in a liquidation. As its in your creditors interest for your business to succeed, they’ll often agree to freeze any interests on the amounts owed and forgo any charges.
This can help to make repayment more manageable and improve cash flow.
What Are the Disadvantages of a CVA?
Negatively Impacts Your Company Credit Score
A CVA, like other insolvency procedures, will have a negative impact on your company’s credit score. This can make it difficult to take out loans, or to order stock/equipment on credit.
Lenders might insist that you sign personal guarantees on the amounts to protect their interests. They may also demand payment on cash terms.
While this might present some challenges, it’s obviously preferable to the alternative – complete closure of the business.
May Endanger Existing Company Contracts
Unfortunately, many company contracts contain an “insolvency clause”. These clauses often state that the contract may be terminated if a participant company enters into insolvency proceedings.
While a CVA doesn’t result in business closure, it is still classed as an insolvency proceeding, which could enable some to terminate their contracts with your business.
Can Be a Cost Burden for the Business
CVA payment plans can last anywhere from 3-5 years. During this time, the business will need to factor in a consistent additional outgoing onto its balance sheet, which can be a considerable strain on an already struggling business.
If the company cannot achieve real change through a structural shake-up and return to a point of sustainable profitability, it’s probably a good idea to pursue a CVL instead.
Failing to meet CVA terms will result in liquidation, so you may unfortunately just be delaying the inevitable.
75% of Creditors Need to Agree
Unfortunately, you cannot just decide to enter into a CVA and begin with the process. You’ll need the backing of 75% of your creditors – by value – in order to get going.
This can be very difficult as you’ll have to convince creditors that a CVA will provide a better outcome for them, not just for your business. You’ll need to prove that they’ll see greater returns than they would otherwise receive in a liquidation, and you’ll have to convince them that there’s a real chance of the business returning back to profitability.
Sometimes this encourages directors to make overly-ambitious promises that they cannot fulfil. This will lead to the company failing the CVA, and liquidating as a result.
50% of Shareholders Need to Agree
This isn’t as difficult as getting the backing of creditors – after all, shareholders rarely, if ever, receive any returns in a CVL – but it is still a factor to consider. Shareholders may not believe the venture is worthwhile.
Secured Creditors Aren’t Bound to the CVA
While it’s unlikely, as they will have already agreed to the arrangement, secured creditors may call in their debts at any time. They’re not bound to the agreement in the same way as unsecured creditors are, as they can just call in their securities. That being said, secured creditors are very unlikely to agree to a CVA in the first place.
Is a CVA Right for Me?
A CVA can be the key to getting a business back on its feet. If you’re struggling with company insolvency, get expert advice as soon as you can – early action always results in a better final outcome.
Our insolvency practitioners can help you to understand your options, helping you to achieve the best possible outcome. If you want to pursue a CVA, we’ll help you to make sure the agreement is reasonable and realistic for your company. If it’s not, we’ll advise you as to your next-best option, whether it be administration or a CVL.
Get in touch to book a free consultation today.
