Chris is an Insolvency Practitioner regulated by the ICAEW since 2014,.
He is experienced in contentious insolvency with excellent analytical skills and strong knowledge of both general and technical insolvency matters.
Deciding whether a Company Voluntary Arrangement (CVA) is the right course of action for your business requires a thorough understanding of its implications, benefits, and potential drawbacks.
Advantages
Disadvantages
Directors retain control over the company.
Adversely affects the company’s credit rating for six years.
More cost-effective than other insolvency procedures.
Securing bank support for a CVA can be challenging.
Provides more privacy, with no obligation to inform the public.
Lengthy process may be unpopular with some creditors.
Protects the company from creditor actions during the CVA.
Secured creditors can still take independent actions.
Freezes interest and charges on debts.
If the CVA fails, the company risks voluntary or compulsory liquidation.
Allows termination of burdensome contracts.
Insolvency practitioners’ fees are included in the fixed payments.
Avoids compulsory investigation into directors’ conduct.
Ensures a better return for creditors compared to liquidation.
Potential for debt write-off at the end of the CVA period.
What are the Advantages of a CVA?
Directors Retain Control & Company Continues Trading
A key advantage of a Company Voluntary Arrangement (CVA) is the empowerment it gives directors. Specifically, it allows them to keep control over their business operations and decision-making processes during financial recovery. Retaining control not only helps maintain the continuity of the business but also implements strategic decisions vital for the business’s recovery and future growth.
Lower Costs
One significant advantage of a CVA is its cost-effectiveness compared to other insolvency rescue procedures, such as administration. The costs associated with a CVA are generally lower, making it a financially viable option for companies facing financial difficulties.
Less Public than Other Insolvency Processes
A CVA offers a degree of privacy not typically available in other insolvency processes. There’s no obligatory requirement to inform clients or the general public about the CVA, allowing the company to manage its public image and business relationships more effectively during a financially sensitive period. This discretion can help maintain client confidence and business stability.
Creates a Legal Ring Fence Called a Moratorium
A major benefit of a CVA is the creation of a legal moratorium, effectively a ring fence, that prevents creditors from taking legal action against the company during the CVA period. This protection gives the company breathing space to restructure its finances without the immediate threat of legal repercussions.
CVAs can Freeze Interest and Charges
A CVA can provide the significant advantage of freezing interest and charges on the company’s debts. This helps stabilise the company’s financial situation, preventing the debt from escalating further and allowing the company to focus on meeting its agreed repayment commitments under the CVA.
It May Be Possible to Terminate Onerous Contracts
Within the framework of a CVA, there is an opportunity to terminate burdensome contracts, including supply contracts, leases, and employment contracts. This flexibility can be instrumental in reducing the company’s operational costs and liabilities.
Insolvency Practitioners’ Fees Are Included
Another practical aspect of a CVA is that the fees for the Insolvency Practitioners are included within the fixed monthly repayment amount agreed upon in the arrangement. This inclusion provides clarity and predictability in financial planning, as there are no separate or additional charges for the Insolvency Practitioners’ services.
No Requirement for Directors Conduct to Be Investigated
Avoiding liquidation through a CVA means that there is no compulsory investigation into the directors’ conduct. This absence of investigation can be beneficial for the directors, as it reduces the scrutiny and potential personal repercussions they might face in a liquidation scenario.
Better Alternative to Liquidation
A CVA is often seen as a preferable alternative to liquidation because it is only proposed if the return to creditors is expected to be better than in a liquidation scenario. This requirement ensures that a CVA is a viable and beneficial option for both the company and its creditors, focusing on maximising the return and preserving the company’s value.
At the End of the CVA Period, Debts Remaining May Be Written-Off
A significant benefit at the conclusion of the CVA period is the potential for remaining debts to be written off. This provision can significantly aid in the financial rehabilitation of the company, allowing it to emerge from the CVA process with a cleaner slate and a stronger foundation for future operations.
What are the Disadvantages of a CVA?
Impact on Company’s Credit Rating for 6 Years
A considerable disadvantage of a Company Voluntary Arrangement (CVA) is its impact on the company’s credit rating. Although a CVA does not affect the personal credit rating of the directors, it adversely affects the company’s credit rating for a period of six years. This lowered credit rating can hinder the company’s ability to secure future credit, impacting its financial flexibility and growth opportunities.
Difficulty in Gaining Bank Agreement
Securing an agreement from the bank for a CVA can be challenging. Banks may be hesitant to support a CVA due to the inherent risks and uncertainties involved. This reluctance can pose a significant obstacle for companies seeking to implement a CVA, as bank support is often crucial for the arrangement’s success and the company’s ongoing financial operations.
Disliked by Some Creditors Due to the Length of the CVA Process
The duration of a CVA can be a point of contention for some creditors. Creditors may be dissatisfied with the extended period over which repayments are made, preferring a quicker resolution to the company’s financial obligations. This dissatisfaction can lead to difficulties in gaining creditor support for the CVA, which is essential for its approval and implementation.
Secured Creditors Not Bound by CVA Terms
A notable limitation of a CVA is that secured creditors are not bound by its terms. This means entities such as HMRC or banks holding secured debts can still pursue actions like withdrawing funding or pushing for liquidation, regardless of the CVA. This potential action from secured creditors can pose a significant risk to the company’s financial stability and the successful execution of the CVA.
Risk of Voluntary or Compulsory Liquidation if CVA Proposal Fails
If a CVA proposal is unsuccessful, the directors may face the stark choice of entering voluntary liquidation or confronting compulsory liquidation initiated by creditors. This situation presents a significant risk, as the failure of a CVA can escalate the company’s financial distress, potentially leading to its ultimate liquidation and the cessation of its operations. This risk underscores the critical nature of carefully considering and preparing a viable CVA proposal.
At Company Debt, we are committed to providing expert guidance and practical advice tailored to your unique circumstances. Our team is here to help you assess whether a CVA is the most appropriate strategy for your business, ensuring you make an informed decision that supports your company’s long-term viability.
