CVAs: Understanding the disadvantages

Disadvantages of a Company Voluntary Arrangement (CVA)

As we mentioned when discussing the advantages of a Company Voluntary Arrangement (CVA), no one promises that a CVA will be a walk in the park. Payments must be made promptly to the supervisor as agreed upon in the CVA proposal and there may be struggles to keep operating costs extremely low. Budgets will need to be set and adhered to. Whilst there are many more advantages to a CVA than disadvantages, the downside is that the disadvantages can be difficult to contend with if proper counsel isn’t followed. Here are some of the main obstacles you may encounter.

An unrealistic CVA whereby the monthly payments are set too high in the proposal without proper future cash flow forecasting being carried out is doomed to failure.  Here at real business rescue we enjoy a high success rate for all our CVA's.

Disadvantage #1 – Getting Directors to Agree

If you think it will be difficult to get creditors to agree to a CVA, try getting your directors to agree that this is the best course of action for your insolvent company! Although there is a business plan in place, each director will have his or her own ‘solution’ to the current financial concerns your company is facing and each one will want to have a say in the matter. This can be overcome with a well qualified and experienced Insolvency Practitioner because they will be able to take control of the meeting to bring order to what could very well turn into a battle of wills.

Disadvantage #2 – Procrastination

Since a creditor cannot initiate a Company Voluntary Arrangement, the directors will need to do so. Unfortunately, many times they have tried (unsuccessfully!) other solutions and as a last resort, turn to an IP for help and advice. If you are here reading this information, then you know that your company is in distress. Do not wait until it is too late to enter into payment arrangements! There are times when directors or owners wait so long before proposing a CVA that it may be difficult, if at all possible, to turn business back around to profitability. The best advice we can offer to overcome this difficulty is, don’t procrastinate, Act Now!

***The time to act is at the first sign of impending insolvency***

Disadvantage #3 – Failure to Keep to the Arrangement

Failure to keep to the arrangements could land you right back in difficulties. This means that the payments agreed in the arrangement need to be paid in full and on time.  Of course there may be times when the monthly payment is late by a day or so. However, keep those times to a bare minimum. If you feel the company might have to miss a payment speak to your supervisor early so that everyone is kept up to date.

 

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Disadvantage #4 – Future Credit May Be Problematic

Some lenders and suppliers will not be overly eager to extend credit in the future after you have entered into a Company Voluntary Arrangement.

This may put a damper on cashflow during the time of the agreement as well as after the arrangements have been paid in full. Even so, one thing which may work in your favour is your payment history. This is where paying each payment on time is of greatest benefit into the future. If you have a good payment history during the CVA, this will reflect well on your company’s willingness and ability to pay its debts. If cashflow is a problem at any time, Real Business Rescue can offer advice on finance and funding to help you.

Although there appears to be only a handful of disadvantages, please understand that some of these will not be easy to overcome. This is where Real Business Rescue can live up to its name! We are business rescue specialists who have met many difficult situations. This has never given cause for alarm and if your business can truly benefit from a Company Voluntary Arrangement, we will advise you to this end. We will only offer solutions which are viable for your company in its current state of financial crisis. If a CVA isn’t the best option, we will be the first to tell you. What this means is that whilst these disadvantages should be heeded, they are not insurmountable as we have proven time after time in the past.  We only ever propose CVA's which have a realistic prospect of success.