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Company Voluntary Arrangement (CVA) vs Pre Pack Administration

When a business is being pressured by creditors and bailiffs the first option that is usually considered is a company voluntary arrangement (CVA). This is a formal agreement between a business and its creditors overseen by an insolvency practitioner (IP) who drafts and proposes the arrangement which would allow the company the time needed to recover, while also maximising the creditor’s chances of being paid in full.

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However, a CVA is not always the appropriate ideal course of action. Sometimes it’s best to start looking at ways to mitigate the negative effects of insolvency instead. 

Entering into administration voluntarily would halt and prevent any legal actions being taken by creditors for a period of up to two months, during which time an IP would manage the business with the goal of reducing debts, negotiating with creditors, and working towards getting a clear picture of the companies finances.

Depending on the circumstances, the IP may recommend arranging a pre-packaged administration sale, in which the sale of assets is planned prior to the procedure. It may even be possible to sell all or some of the assets to your company’s directors, who could then transfer them to a new company, provided that they make the best offer who could then use them in their new company.

A pre-pack administration sale is considered preferable to a CVA when:

The Prospect of Recovery Seems Unlikely

Many times even a CVA is not enough to make a company viable again; a CVA will not always solve lack of business and/or cash flow. If we feel that a full recovery seems unlikely we may recommend a pre-pack administration as a way to deal with the company's problems, and preserve the company’s assets so that they can be bought by a new company, and facilitate the best outcome for creditors.

Creditors Have Been Unwilling to Cooperate

If creditors have shown that they’ve been unwilling to cooperate with negotiations in the past and/or have turned down one or more attempts at a CVA or Time to Pay scheme, we may suggest a pre-pack administration sale instead. Although we would still have to hold a creditors’ meeting to gain the approval of all parties involved, usually a pre-pack is accepted as long as it can be shown that it provides the best outcome for creditors as a whole.

Assets Are Desirable But Debts Are Too Burdensome

It should be noted that many CVA's fail before they reach their conclusion, this is generally because not only are the companies paying their historic liabilities through the CVA, they must also keep on top of their current liabilities.

If the debts are simply too high to be relieved through a CVA and the company has equipment, inventory, contracts, clients, or other assets that you don’t want to lose control of during liquidation, then a pre-pack sale might allow you to purchase for a new limited company so you can focus on starting again. Instead of losing all the work in progress your company has you could transfer your work to a new company. This process relies heavily on the professionalism of the appointed insolvency practitioner, valuation agents and solicitors.

Directors Have the Funds Needed to Purchase Assets

If a CVA cannot be achieved, and one or more of the members/directors has enough money to purchase the company’s assets, a pre-pack sale would allow the business to smoothly transition from operating under one limited company to another with minimal interruptions. Since the members of a limited company are not held personally liable for the debts of the business their ability to act as the directors of the new company would not be affected so long as they have not been involved in any wrongful trading.

Employee and Supplier Contracts Are Limited

One of the commonly overlooked reasons why a CVA is so beneficial is that it allows the company to terminate employee and supplier contracts without investing a lot of money to do so (subject to creditor approval). On the other hand, during a pre-pack sale employee rights and TUPE regulations have to be considered to prevent accusations of unfair dismissal. 

If your company has been unable to keep up with payments and you’d like to try for new terms, call us today on 0800 644 6080 to find out how we can help. We’ll provide a free consultation during which we’ll assess whether pre-pack administration would be preferable to a CVA for your business. 

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