When the directors of a struggling company decide to approach an insolvency practitioner for assistance, they should expect to receive completely impartial, expert advice.
However, it can be the case that the administration route is recommended over and above a company voluntary arrangement (CVA), even when this cheaper process, which leaves the company directors in control of the business, could be the better option.
So, how do you decide which is the best course of action for your business? Here’s our guide.
Administration involves an insolvency practitioner taking control of the company’s affairs, with the primary aim of rescuing the business or achieving better results for creditors than immediate liquidation.
A CVA, on the other hand, allows the business to continue trading under existing management while repaying debts over an agreed period.
The choice between these procedures typically depends on the company’s viability, creditor attitudes, and the extent of restructuring required.
Objectives of a CVA vs Administration
The objectives of Administration and a CVA are fundamentally distinct, as I’ll explain.
Administration is designed with three primary objectives in mind:
To rescue your company as a going concern, if possible.
To achieve a better result for creditors than immediate liquidation.
If the above isn’t feasible, to realise property to pay secured or preferential creditors.
In practice, the appointed administrator, acting as an officer of the court, must pursue these objectives in order. The focus is on corporate rescue where viable, or maximising returns to creditors where rescue is unfeasible.
A CVA offers a different approach, focusing on business continuity while addressing debt issues:
Facilitating company survival through consensual debt restructuring
Providing superior returns to creditors compared to alternative insolvency procedures
Preserving business value and employment where possible
With a CVA, you retain company control but must stick to the agreed repayment plan. This option can be particularly attractive if your business is viable but temporarily struggling.
Impact of a CVA vs Administration
The choice between Administration and a Company Voluntary Arrangement (CVA) will have profound implications for a company’s operations, stakeholder relationships, and future viability.
The impact of an Administration is often immediate and far-reaching. Upon the appointment of administrators, market perception usually shifts dramatically. Suppliers might tighten credit terms or demand cash on delivery, whilst customers hesitate to place orders, fearing non-fulfilment.
Many commercial agreements contain ipso facto clauses permitting termination upon insolvency, which means crucial contracts may be lost, affecting the company’s value and operational capabilities. Moreover, the transfer of control to administrators brings operational disruption, impacting productivity and employee morale.
In contrast, a CVA typically offers a far less disruptive path. The company continues to trade under existing management, maintaining operational continuity. Customer and supplier relationships are preserved, which means you can fulfill ongoing contractual obligations.
Financially, a CVA allows the company to retain profits made after meeting monthly repayments, providing much-needed working capital for growth or stabilisation.
Control of the Business in a CVA vs. Administration
The allocation of control marks a crucial distinction between Administration and Company Voluntary Arrangements (CVAs).
In Administration, an appointed insolvency practitioner assumes full control of the company’s affairs. This administrator, acting as an officer of the court, wields significant decision-making power. They determine whether to propose a CVA, pursue a going concern sale, or initiate liquidation. Directors’ influence in this scenario is substantially diminished, often limited to providing information and cooperating with the administrator’s inquiries.
Conversely, a CVA preserves the existing management structure. Directors maintain operational control, operating within the framework of the agreed arrangement. This continuity can be vital for maintaining business relationships and operational stability. The CVA provides a structured timeline, offering directors clarity on repayment schedules and duration.
A key feature of CVAs is their binding nature post-approval. Once the requisite majority approves the arrangement, all eligible creditors are bound by its terms, regardless of their individual votes. This aspect can be particularly advantageous when dealing with a diverse creditor base, as it prevents individual creditors from undermining the rescue attempt.
The choice between these procedures often hinges on creditor confidence in the existing management and the perceived viability of the business under current leadership. Where trust remains intact, a CVA may be preferable. However, in cases of severe creditor mistrust or evident mismanagement, the more interventionist approach of Administration may be necessary.
Restructuring
If a company’s debts are too large for a CVA, a pre-pack administration may be an option. Pre-pack administration involves the sale of a company’s business and assets to a new entity, typically executed immediately before or upon entering administration. This approach can effectively preserve business assets, equipment, contracts, clients, and inventory. However, it’s crucial to navigate employee rights and TUPE regulations carefully in this process.
CVAs can still serve a valuable purpose even in high-debt situations. They can be utilised to secure the time needed for comprehensive restructuring. This breathing space allows companies to reconfigure their affairs and develop viable future plans. As part of this process, CVAs may facilitate the termination of employee and supplier contracts, potentially alleviating cash-flow pressures.
Investigations into Directors’ Conduct
The approach to examining directors’ conduct differs significantly between Administration and Company Voluntary Arrangements (CVAs), reflecting the distinct nature and objectives of these insolvency procedures.
In Administration, scrutiny of directors’ actions is a statutory requirement:
The administrator, as an officer of the court, must conduct a thorough investigation into the directors’ management of the company.
This investigation aims to identify any potential misconduct, breaches of fiduciary duty, or transactions that may be challenged.
Findings may lead to disqualification proceedings or actions to recover assets for creditors’ benefit.
By contrast, CVAs do not mandate formal investigations into directors’ conduct:
The focus is on the company’s future viability rather than past management decisions.
However, the absence of mandatory investigations does not preclude scrutiny if concerns arise during the CVA process.
Directors remain subject to their statutory duties and can face consequences for any identified misconduct.
Tax Liabilities in CVA vs Administration
In Administration, the tax consequences can be severe. Any tax losses accumulated by the company cannot be carried forward to reduce future tax liabilities on gains. This limitation can significantly impact the company’s financial recovery prospects, particularly if it emerges from Administration as a going concern or if its business is sold to a new entity.
Conversely, CVAs offer a more favourable tax treatment. Under a CVA, the company retains the ability to carry forward tax losses to offset liabilities arising from future profits. This preservation of tax losses can provide a valuable financial buffer as the company works towards recovery, potentially reducing its tax burden in subsequent profitable years.
