Are you considering entering into a CVA? A Company Voluntary Arrangement can give your company the time and space it needs to improve its finances and pay off its debts to creditors.
While a CVA is usually the best option for viable companies that are insolvent, it’s not an instant solution to your company’s problems. It’s also not a solution that is appropriate for all struggling companies.
CVAs, like any other insolvency procedure, have upsides and downsides. Below are the major advantages and major disadvantages of entering into a CVA as a means of helping your company recover from insolvency.
Advantages of entering into a CVA
You stay in control of your company, even while it’s in a CVA
One of the biggest advantages of a CVA is the control it gives you over your company as it recovers. Unlike administration, which involves an administrator managing the recovery of your company, a CVA gives control to the company directors.
This means that you control your company’s direction as it recovers and carries out the obligations of its CVA. While you must comply with the CVA, you make all of the major decisions about your company’s future and lead it towards a full recovery.
Pressure from creditors and HMRC ends while you prepare a CVA
Entering into a CVA protects your company against pressure from its creditors, such as statutory demand notices. As your insolvency practitioner prepares the CVA, legal pressure from creditors is suspended and the risk of liquidation is minimized.
This makes a CVA an optimal solution for companies that have a viable future but face pressure from their creditors. As long as your company complies with the CVA, it will not face pressure or liquidation attempts from its creditors.
Entering into a CVA can improve your company’s cash flow
One of the biggest advantages of entering into a CVA, as opposed to using another insolvency solution, is that a CVA is designed to benefit both your company and its creditors.
In a CVA, your company will be required to make a realistic monthly payment based on its cash flow. Since creditors want your company to keep trading and generating cash, it’s in their interest to agree to a realistic monthly payment.
The improvement in cash flow a CVA offers can make it far easier for your company to continue trading and raise funds to pay its creditors.
While in a CVA, your company is protected from creditor legal action
Your company can’t be wound up by its creditors while a CVA is being prepared by an insolvency practitioner. Entering into a CVA gives your company a powerful and effective legal shield against liquidation threats.
In some cases, a CVA can prevent legal action that’s already been initiated. If your company has received a winding up petition from a creditor, proposing a CVA may result in the creditor agreeing to an alternative to the liquidation process.
In many cases, a CVA is the best option for avoiding liquidation
Compared to other insolvency solutions, a CVA almost always provides the optimal outcome for creditors and directors. Directors remain in control of the company as part of a CVA, while creditors receive at least partial payment on their debts.
As well as providing an optimal outcome for directors and creditors, a CVA usually costs significantly less than other insolvency solutions. A CVA is a far less expensive option than entering into administration for the majority of companies.
Entering into a CVA is far less public than other options
If your company enters into administration, a notice is published in The Gazette to alert the public to its financial distress. This can have a negative effect on customer confidence and, in some cases, cause your company to lose business.
In contrast, A CVA is a private solution to your company’s financial issues that isn’t published or widely advertised. Your company gains the opportunity to restructure and recover without negative publicity affecting its business.
In a CVA, your company can make important restructuring changes
One of the biggest advantages of entering into a CVA is that your company is free to make important restructuring changes relatively easily. In a CVA, your company can terminate unprofitable contracts and more easily make staff redundant.
These actions can be taken at no cash cost to your business, making the process of recovering far more financially manageable. This makes a CVA an ideal solution if your company is held back by unprofitable, burdensome contracts and deals.
Both your company and its creditors benefit from a CVA
Finally, compared to alternative solutions such as liquidation, which often results in creditors recovering very little of what they are owed, a CVA offers the best possible outcome for both your company and creditors that depend on it.
Although creditors may not be paid in full on their debts, they can recover some of the amount they are owed. Your company also benefits from a CVA through eased cash flow and the potential to continue trading towards a complete recovery.
Disadvantages of entering into a CVA
Entering into a CVA can affect your company’s access to credit
When your company enters into a CVA, its credit rating reverts to zero. This means that accessing credit, whether from a bank or from a supplier, becomes significantly more difficult for your company.
Although the effects of a CVA on your company’s credit access are negative, it does not mean your company can never access credit again. Several options are available for your company to improve its access to credit during and after a CVA.
If you break the terms of a CVA, your company could be liquidated
If your company fails to meet the terms of its CVA and misses a payment, creditors can restart the pressure and potentially wind up your company. This makes it vital that your company complies in full with the requirements of its CVA.
To ensure your company can fulfil its obligations, most CVAs specify a payment that is well within the company’s financial abilities. A lower monthly payment on a long-term CVA provides stable cash flow that makes making timely repayments easier.
At least 75% of creditors need to approve your CVA proposal
In order for your CVA proposal to be accepted, at least 75% of creditors (by value of their debt) need to approve it. Even if more than half of your creditors agree, a CVA can still be blocked by a minority of creditors that prefer company liquidation.
Landlords are particularly opposed to CVAs, as leases can easily be terminated in a CVA deal. If your company has one large creditor that accounts for more than 25% of its total debts, they alone could hold prevent your CVA from being approved.
A CVA is not a short-term solution and can take several years to complete
It can take years to pay off your company’s debts under a CVA, making it a solution that is not designed for short-term recovery. Most CVAs take between two and five years to complete and are only suitable for companies with a long term approach.
If your company isn’t viable for a long period, a CVA may not be its most suitable recovery option. Alternative insolvency solutions such as administration or using short-term finance to pay debts may be better suited to certain companies.
Does your company need expert help?
If your company is financially distressed and can’t pay its creditors, you need to act quickly to prevent legal action. A CVA could be the ideal solution to your company’s financial issues.
Under a CVA, your company will receive several years to pay its debts and return to profitability. Creditors will be paid part of what they are owed while your company focuses on restructuring, recovering and moving ahead.
In the meantime, your company is shielded against legal action from creditors. We can review your company’s finances and determine the best solution, whether it’s a CVA or an alternative option such as entering into administration.
Contact us to speak to an insolvency expert and learn more about the CVA process for your company. We’re here to help you make the right decision to protect your company and preserve its future while ensuring creditors are treated fairly.
Other insolvency procedures
Administration is an alternative insolvency procedure that protects your company from being wound up by its creditors. Unlike a CVA, which puts you in control of the company, administration hands management of the company to a third party.
Learn more about administration.
Pre-pack administration is an insolvency procedure that allows you to sell certain company assets to a newly created company. This allows for a simple transition to the new company and a resumption of trading.
Learn more about pre-pack administration.
Liquidation allows you to close your company and end pressure from its creditors by liquidating its assets. If your company is insolvent and unviable, liquidation is a simple way to end its trading history and stop creditor pressure.
Learn more about liquidation.
Your company may be able to pay its creditors using cash from a loan or financing solution. Emergency business loans and solutions such as invoice factoring can free up cash and help your company pay its short-term debts.
Learn more about finance solutions.