Company Voluntary Arrangement (CVA) vs Pre Pack Administration

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

When a business is being pressured by creditors there are a number of formal insolvency procedures which can be considered in order to allow the company to continue trading. The preference of many directors 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.

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When a CVA may not be appropriate

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, will increase the chances of the proposal being passed.

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 you may be advised to consider placing your company into administration.

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Consider company administration

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 company’s finances.

Depending on the circumstances, the IP may recommend arranging a pre-packaged administration sale; this would be planned prior to the procedure and would 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 new company, or ‘newco’, provided that they make the best offer for the assets.

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; 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 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 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.

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 to find out how we can help. We’ll provide a free consultation during which we’ll recommend the best course of action for you and your business.