Is an Administration or CVA the Best Course of Action?

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.

The objectives of each process

Administration – A company administration is a formal procedure in which an insolvency practitioner is appointed to act as the administrator and take control of the company with a view to bringing about a recovery. If the business is past the point of recovery, the administrator may choose to sell it as a ‘going concern’ or close the company down.

Company voluntary arrangement  – A CVA is a valuable tool that can preserve the business while generally providing a better return to its creditors than an administration. In a CVA, a business proposes an agreement to repay part or all of the money it owes to its creditors over a fixed period of time. During that time, the directors remain in control of the company and continue to trade.  

The impact on the business

Let’s take a look at how each process will impact the business in a number of key ways:

Continuation of trade

  • Administration
    – An administrator will be reluctant to trade unless they feel it will provide a better return for the creditors. Administrations are subject to a one-year time limit. This can make it difficult to retain the goodwill of suppliers and customers, who may choose to go elsewhere. If the company can be saved, there will be a lot of rebuilding to do.  
  • CVAOnce in place, a CVA allows a company to continue to trade with very little effect on the day-to-day running of the business. As long as the monthly repayments are made, companies will be allowed to retain any profits they make. In many cases, suppliers are happy to continue doing business with a company in a CVA, although they may ask for cash on delivery payments. Companies can also keep key contracts and accreditations which might be difficult to transfer in a new company created through an administration.

Control of the business

  • Administration – Once appointed, the administrator will be in control of the business. They will decide whether it should be put into a CVA and continue to trade, sold as a going concern or liquidated. Although most administrators will involve company directors in this process, the directors will have very little control over the final decision.
  • CVA – A CVA allows the company directors to continue trading and to maintain control of the company. Once the CVA begins, everything will happen within a predetermined period of time and the directors will know exactly when the monthly repayments will need to be made. If the CVA is approved, all creditors entitled to vote, even those that refused the agreement, will be bound by its terms and will not be able to take any action against the company.

Restructuring

  • Administration – If the debts are too large to be dealt with by a CVA and you don’t want to lose company assets, equipment, contracts, clients and inventory, a pre-pack sale could be arranged. In the event of a pre-pack, the employee rights and TUPE regulations will have to be considered.
  • CVA – A company voluntary arrangement buys the time a company needs to restructure its affairs and put a viable plan for the future in place. This includes allowing the company to reduce the cash-flow burden by terminating employee and supplier contracts if required.  

Investigations into directors’ conduct

  • Administration – Administrators must undertake an investigation into the conduct of directors in their management and running of the company.
  • CVA – There are no investigations into directors’ conduct.  

Tax liabilities

  • Administration – When administration begins a new tax period is created, which means any tax losses cannot be brought forward to reduce future tax liabilities on gains.
  • CVAIf a company entering a CVA has accumulated tax losses, these can be carried forward to offset liabilities arising from future profits.

When and why might you choose to enter into administration?

So, despite being commonly overlooked, the benefits of a CVA can make it the perfect way for a company to consolidate its debt and continue to trade. But there are cases when an administration will be the most appropriate solution. That includes:

  • It’s unlikely the business will recover

A CVA will not always be enough to make a company viable again, particularly where there is a severe lack of business or cash-flow.  In that case, an administration with a pre-pack sale may be a better way to deal with the company’s problems while preserving the assets.  

  • Creditors are not willing to cooperate

It could be that the company’s creditors have been unwilling to negotiate or have turned down a CVA in the past. In that case, more attempts at a CVA are likely to be futile. Instead, the directors may wish to consider an administration to achieve the best outcome.

  • There’s too much debt

It’s important to note that many CVAs fail before they reach their conclusion. This is usually because the company must pay their current liabilities as well as their historic debts. If there’s too much debt for a company to realistically afford, a liquidation or pre-pack sale could be the best option.

  • Directors have the money to purchase assets

If a CVA cannot be agreed and the company’s directors or members have the money to purchase the company’s assets, an administration could be an effective way to make the transition to a new business with minimal interruptions.

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