What are the advantages and disadvantages of a Company Voluntary Arrangement (CVA)?

Understanding the pros and cons of a CVA

A Company Voluntary Arrangement (CVA) can be a great option for a financially distressed business looking to turn around its fortunes. CVAs, however, are not suitable for all companies, and like all insolvency processes, there are a number of advantages, as well as disadvantages, to consider before going ahead. Let’s take a closer look:

Advantages of a CVA

• Trade continues – The premise of a CVA is that current debts will be paid using future profits. This requires the company to continue trading and generating revenue in order to adhere to the terms of the arrangement. CVAs typically offer undisturbed trade and seamless continuity for company, creditors, and employees alike.
• Director remains in control – Unlike some other insolvency processes, with a CVA the directors remain in control of the company and its operations at all times. As a company will continue to trade while in a CVA, it makes sense that those who know the business the best – its directors – are able to continue leading the company during this time.
• Unaffordable debt is written off – As part of the terms of the CVA, it is likely to be the case that creditors have to agree to write off some of the money they are owed in order for them to receive some of the outstanding balance. A major advantage of CVAs is that they are typically beneficial for both the indebted company and its creditors if correctly drafted.
• No director conduct investigation – If a company enters into liquidation or administration, the appointed insolvency practitioner is duty-bound to conduct an investigation into the conduct of the directors during the time leading up to the company becoming insolvent. With a CVA, however, this is not necessary. Once a CVA has been approved, trade will continue as usual with no further investigation into the company’s affairs.
• Eases creditor pressure – A huge advantage of a CVA is that once it has been approved by creditors, it becomes legally-binding on all parties. This means creditors who are bound by the terms of the CVA cannot ask you to pay any more money towards your debts that what has already been agreed. Not only can a CVA relieve directors of creditor pressure, it also provides a valuable element of certainty and security with their outgoings as they know exactly how much they will have to pay towards their debts each month.

Disadvantages of a CVA

• Can be costly – CVAs involve the input of a licensed insolvency practitioner who will assume the roles of both nominee and supervisor. As nominee, the insolvency practitioner will work alongside the company’s directors to draft a CVA proposal before presenting this to creditors. Once the CVA has been granted creditor approval, the insolvency practitioner will act as supervisor for its duration, collecting payments and distributing these as agreed. A disadvantage of a CVA is that due to this extensive involvement, they can be a costly option.
• Ongoing commitment – CVAs typically run between 3-5 years, during which time the company is legally-obliged to make the payments towards the CVA as agreed. This requires an ongoing commitment and dedication on the part of the director to sustain these payments over a considerable length of time. Many CVAs fail before they reach their conclusion due to this commitment waning over time
• Difficulty obtaining credit – As a CVA is a formal insolvency process, it can have a negative effect on a company’s ability to obtain credit in the future. Before entering into a CVA you should consider how you will finance the company and its operations on an ongoing basis. This is something you can discuss with your insolvency practitioner as part of the process.
• Needs creditor approval – One of the major disadvantages of a CVA is that 75% (by value) of a company’s creditors need to consent to the proposed arrangement. It is vital that you propose repayment terms which strike the delicate balance of offering enough money to satisfy your creditors, while not overextending yourself and proposing an amount which is unaffordable in the long-term. Creditors need to be convinced that your company will be able to adhere to the terms of the CVA for its duration before they are likely to give the go-ahead.

If you are considering a CVA for your company, contact the Real Business Rescue team today. Our licensed insolvency practitioners will be able to discuss the advantages and disadvantages of a CVA with you in more detail, and assess whether a CVA is suitable for your company. Call the team today on 0800 644 6080.