Company Voluntary Arrangement (CVA) vs Pre Pack Administration

Understanding the differences between a Company Voluntary Arrangement and Pre Pack Administration

When a business is facing creditor pressure there are a number of formal insolvency procedures which can be considered in order to allow the company to continue trading while dealing with its debt problems at the same time.

One option is to enter into a process known as a Company Voluntary Arrangement (CVA). A CVA is a formal agreement between an indebted business and its creditors which is overseen by a licensed insolvency practitioner (IP). The appointed IP will be in charge of drafting and proposing a mutually agreeable payment plan which would allow the company the time needed to trade its way out of difficulty, while also maximising returns for creditors.

Another option is to facilitate a sale of the business using the pre-pack administration process. This is where a sale of business assets is arranged prior to the formal appointment of the insolvency practitioner. With a pre-pack process, the sale is often made to a party already connected with the insolvent company operating under a new company - or 'newco'.

Understanding Company Voluntary Arrangements (CVAs)

Although in theory a CVA may sound like the perfect remedy for a struggling but otherwise potentially successful company, it is not always the most appropriate course of action. In order for a CVA to be implemented, at least 75% (by value) of a company’s creditors must agree to the proposal. Being able to demonstrate that your business has a viable future and therefore likely that you will be able to keep up with the monthly payments for the duration of the CVA, is vital if the proposal is to receive creditor approval.

If creditors have turned hostile and/or legal actions have been initiated against your company, a CVA may not be an appropriate solution to your current issues. If you need protection from legal proceedings or you believe you are unable to service the required monthly obligations required by a CVA, you may wish to consider pre-pack administration as an alternative.

 

 

 

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Pre-pack Administration vs Company Voluntary Arrangement

Depending on the circumstances, your insolvency practitioner may recommend arranging a pre-packaged administration sale instead of proposing a CVA. A pre-pack sale involve the sale of assets to a willing buyer; 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 newco, provided that they make the best offer for the assets.

While the purchased assets would be sold to the newco, the liabilities of the existing insolvent company would remain with the insolvent company rather than being transferred over. This gives the newco the ability to trade free from the burdensome debts of the existing business.

Here are some of the main considerations that have to be taken into account when deciding whether a pre-pack administration sale or a CVA is most appropriate:

• Viability of company

Many times even a CVA is not enough to make a company viable again; while a CVA can ease cash flow issues, it will not solve problems caused by a lack of business or deep-rooted financial management concerns. If we feel that a full recovery seems unlikely we may recommend a pre-pack administration as a way to deal with any deep-rooted issues, and preserve the company’s assets in order to facilitate the best outcome for creditors.

• Creditor co-operation

If creditors have shown that they’ve been unwilling to co-operate 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. While creditor approval may be sought as part of a pre-pack sale, alternatively a qualifying evaluator's report can be obtained prior to any substantial disposal being made to a connected party to confirm the terms of the pre-pack sale are reasonable.

“Spoke with Chris who put me at ease straight away. He was very knowledgeable and listened intently to all my worries and concerns. Will definitely be using Real Business Rescue and advise anyone with business issues to give them a call.”

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Chris Bristow
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• Value of assets

It should be noted that many CVAs fail before they reach their conclusion, this is generally because not only are the companies paying their historic liabilities through the CVA but 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 these through 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.

• Ability to fund the purchase

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 directors of a limited company are not held personally liable for the debts of the business (unless a personal guarantee is in place) 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.

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.

How Real Business Rescue can help

If your company is struggling to keep up with payments to creditors and you’d like to explore your options for either a CVA or a pre-pack administration process, call us today to find out how we can help. You can arrange a same-day consultation with one of our licensed insolvency practitioners who can explain your options and highlight the one which is most suitable for your company's current position. Call our team on 0800 644 6080.