If your business is struggling financially, a company voluntary arrangement (CVA) could be used to negotiate new payment terms with your creditors for existing debts.
Rather than having to repay the debts immediately or face closure, once agreed, a CVA can give you a period of up to five years to repay all or a proportion of the money you owe. That can reduce the strain on your business’s cash-flow and provide the breathing space you need to continue to trade and turn your business around.
But no formal insolvency procedure is a walk in the park. There are certainly some pretty compelling advantages associated with a CVA, but there are also a number of potential disadvantages of this course of action too.
In this guide, we’re going to explore the many advantages and disadvantages of a company voluntary arrangement to help you consider whether it could be the right option for you.
What are the Advantages of a CVA?
For many businesses, the advantages of a company voluntary arrangement outweigh the negatives. But what are the positive aspects of a CVA for your business?
You can continue to trade
Undoubtedly one of the main advantages of a CVA is that it allows your business to continue to trade. Even if creditors have taken legal action against your business, once the CVA has been agreed, that action will be stayed and the creditors included in the CVA will not be able to take fresh action against you. Even if a creditor has issued a winding up petition against your business and your bank accounts have been frozen, a CVA will buy you time to seek a validation order to reopen your accounts and continue to trade.
It puts an end to creditor pressure
Constant demands for payment from creditors can be extremely stressful and draining, particularly when you receive them from suppliers you really value and powerful creditors like HMRC. In the early stages of a CVA, your creditors will be asked to vote on whether to accept the terms of your CVA proposal. If the CVA is accepted, those creditors will no longer be able to make demands for payment or threaten to take action against you. That can come as a huge relief and give you the breathing space you need to focus on the recovery of your business.
Interest and charges are frozen
Another advantage of a CVA is that once the arrangement has been put in place, any interest and charges being applied to your debts will be frozen. That prevents your debts from escalating further and gives you a finite figure you have to repay.
You stay in control
Unlike other insolvency options such as administration and a creditors’ voluntary liquidation, a CVA allows the company owner/directors to remain in complete control of the business throughout the process and thereafter. No one knows the business like you, and even if past performance has been mixed, your knowledge combined with the professional guidance of an insolvency practitioner will give the company the best chance of making a full recovery.
The debt can be reduced
Another compelling advantage of a company voluntary arrangement is that in many cases, once the CVA has been completed, a significant amount of the company’s debt is written off. That leaves the business in a better position to trade profitably and grow in the future.
One common concern of a business entering a CVA is that their existing suppliers will not agree to extend them credit once they learn they will only receive a proportion of the money they are owed. However, it’s often the case that the supplier will need the business just as much as you need their supplies, although they may change their payment terms.
Contracts and leases may be terminated
This is one of the more obscure advantages of a CVA that has attracted some controversy in recent years. If you have existing leases, supply contracts and even employment contracts that put the future survival or your business at risk, it is possible they can be renegotiated or even terminated under the terms of a CVA. That can help to reduce your costs and give you the best possible chance of success.
You receive professional advice
As well as buying you the time to turn your business around, as part of the CVA process, you will also benefit from the professional advice of a company rescue team. They will work with you to develop a plan to restructure your business model while you continue to run the business on a day-to-day basis.
There’s no investigation of your conduct as a company director
An essential part of many insolvency procedures is for the conduct of the company directors to be investigated in the period leading up to the insolvency. If any examples of wrongful trading or improper practices are identified, the directors can be made personally liable for a proportion of the company’s debts and even face a director disqualification order. In the case of a CVA, there is no requirement for an investigation to take place.
It’s cheaper than other insolvency procedures
The costs associated with setting up the CVA and the ongoing management and administration are significantly less than other insolvency procedures. Although an upfront fee has to be paid to set up the initial creditors’ meeting, the lion’s share of the ongoing costs form part of the monthly CVA repayments. That makes the costs much easier to budget for.
What are the Disadvantages of a CVA?
There’s certainly no shortage of advantages associated with a CVA, but it’s not all good news. There are also a number of disadvantages that must be considered carefully before the decision to enter a CVA is made.
Your fellow directors have to agree
Getting 75 percent of your creditors (by value of debt) to agree to a company voluntary arrangement is one thing, but it can be more of a challenge to persuade your fellow directors that a CVA is the best course of action for your business. Each director will usually have an opinion on the company’s financial issues and have their own solution in mind. If your business has a number of directors then a board decision to instigate a CVA can be made by majority vote. However, it’s usually best if all directors support the plan.
The timing must be right
With a number of insolvency procedures out there for struggling companies, it can take some time before the directors decide a CVA is the best course of action. It’s common for other unsuccessful attempts to rescue a business to be made before turning to an insolvency practitioner for advice. By that point, it may be too late. The longer you wait, the more difficult it can be to return a business to profitability via a CVA. The best time to act is at the first sign of impending insolvency. That will give a CVA the very best chance of success.
It’s only an option if the business can return to profitability
Another disadvantage of a company voluntary arrangement is that it’s only an appropriate solution for businesses that are inherently profitable. There must be a clear indication that the business could return to profitability if changes to its business model are made for a CVA to be considered. Comprehensive planning and forecasting are carried out as part of the CVA process to ensure the business is viable and can be successful once again.
The company’s credit rating will be damaged
Even if creditors are repaid in full via the CVA, the process will still harm the company’s credit rating and could make it more difficult to obtain credit from suppliers and lenders in the future. That said, if your CVA repayments are made on time and in full every month, it will certainly reflect favourably on your business and show that you are willing and able to repay your debts. There are also a number of alternative finance options that could still be available to you during and after a CVA, such as invoice finance, which we can help you explore.
Secured creditors are not bound by a CVA
Another potential disadvantage of a company voluntary arrangement is the fact that secured creditors, such as banks and other asset-based lenders, are not bound by the terms of the agreement. In theory, that means they could still take legal action against your business for the recovery of debts even after the CVA is in place.
However, in practice, secured lenders are generally happy that a CVA is in place as long as their debts are being repaid. Debts to banks and other lenders are not usually reduced by a CVA, but the proposals will be created in such a way to allow the business to continue servicing debts to secured creditors.
Failing to stick to the arrangement will cause serious problems
CVA repayments need to be made on time and in full every month for a period of up to five years. That requires a real commitment from the company directors to turn the business around. If there are isolated cases when the payment is late by a day or two then that shouldn’t cause a problem. However, if you find yourself in a position where you are unable to make a payment then you should contact your CVA supervisor immediately. A failure to stick to the arrangements could lead to the cancellation of the CVA and the company may be closed.
Find out whether a CVA could be a suitable option for you
A company voluntary arrangement can be an excellent way to turn a struggling company around and give it a second chance to be successful. However, it is not a suitable option for every business. Please do not hesitate to get in touch for a free, confidential and no-obligation discussion about your circumstances with our team.