CVA vs Administration
When the directors of a struggling company decide the time is right 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 vs Company Voluntary Arrangement: What’s the Difference?
Administration and a Company Voluntary Arrangement (CVA) are both ways for a company to deal with financial difficulty.
In an administration, an insolvency practitioner is appointed to take control of the company and make decisions about its future. In a CVA, the company’s directors remain in control, but they must follow a plan to repay the company’s debts over time.
Objectives of a CVA vs Administration
- To rescue or wind up a company that is unable to pay its debts.
- To ensure that creditors are paid as much as possible from the company’s assets.
- To protect jobs and minimize disruption to the business, if possible.
- To allow a company to continue trading while repaying its creditors over a fixed period of time.
- To provide a better return to creditors than an administration would.
- To preserve the business and jobs.
Impact of a CVA vs Administration
- Can damage customer goodwill, as suppliers and customers may be reluctant to do business with a company in administration.
- Can make it difficult to retain key contracts and accreditations.
- Can be disruptive to the day-to-day running of the business.
- Allows the company to continue trading with minimal disruption.
- Allows the company to retain profits made after monthly repayments are met.
- Suppliers are more likely to continue doing business with a company in a CVA than a company in administration.
- Allows the company to keep key contracts and accreditations.
Control of the Business in a CVA vs. Administration
- An administrator is appointed to take control of the business.
- The administrator will decide whether to put the business into a CVA, sell it as a going concern, or liquidate it.
- Directors have very little control over the final decision.
- Directors retain control of the business.
- Everything happens within a predetermined period of time, with directors knowing exactly when monthly repayments need to be made.
- If the CVA is approved, all creditors entitled to vote are bound by its terms, even if they refused the agreement.
If a company’s debts are too large for a CVA, a pre-pack administration may be an option. This involves selling the business to a new company before it enters administration. This can help to preserve the business’s assets, equipment, contracts, clients, and inventory. However, employee rights and TUPE regulations must be considered.
A CVA can also be used to buy the time a company needs to restructure its affairs and develop a viable plan for the future. This may involve terminating employee and supplier contracts to reduce the cash-flow burden.
Investigations into Directors’ Conduct
An administrator must investigate the conduct of directors in their management and running of the company.
There are no mandatory investigations into directors’ conduct.
Tax Liabilities in CVA vs Administration
- Any tax losses cannot be carried forward to reduce future tax liabilities on gains.
- Tax losses can be carried forward to offset liabilities arising from future profits.