When a company reaches the point of not being able to pay its creditors, something just has to be done. There are many possible paths for such a business to take, and, as it is such a complex area, it is always best to seek help from a licensed insolvency practitioner.
One of the most used routes for a company to become solvent again is of using a CVA.
A CVA can result in a reduction of the level of outstanding debt, as well as giving the company an extended period of time to repay the remaining debt, most often between 3 and 5 years. However, a CVA can only be used where three-quarters of the creditors, by the total level of monies due, agree to support the CVA. To ensure fair play for all, CVAs are monitored by a supervisor, who has to be a licensed insolvency practitioner.
Once the CVA has been signed off all unsecured creditors, have to respect the arrangement, the good news being that the company carries on and operates as usual, with the directors retaining control.
Of the many paths to solvency, the CVA is often considered the best where a company is viable, but has too many historic debts.
This allows the directors, who continue in place, to work through their current financial issues, as long as that is they have dealt with the areas that created the debt situation in the first instance.
What Are The Advantages of a CVA?
- Company voluntary arrangements, by reducing the level of payments, can quickly improve cash flowy
- Gives a company some breathing space as if the HMRC is chasing payment for tax, VAT, or PAYE, the CVA will cause any action to stop, at least while the company’s voluntary arrangement is put into place.
- A CVA can often stop any threats of a winding up petition.
- Any costs are minimized by making some expensive managers redundant.
- CVAs can allow you to remove staff, any costs or compliance obligations due because of leases, as well as any bad supply contracts, all with no costs.
- Assist cash flow management by including all the monies due to creditors into one lump monthly payment. This is paid to the supervisor who then distributes it as agreed.
- Allows the dismissal of employees with no redundancy costs(in lieu of notice) as these are covered by the Government.
- The Board and shareholders retain control of the business.
- CVAs are cheaper than a Scheme of Arrangement or Administration.
- The brand does not necessarily suffer any damage as a CVA is not announced publicly and the company does not have to inform its customers.
Good News For Creditors Too
Creditors also gain from the system, as they often keep a customer and receive at least some of the monies they are owed (other rescue methods can result in very low levels of debt recovery), ranging from 30% to 100%.
How Much Does a CVA Cost?
The costs vary dramatically depending on:
- How many creditors are involved?
- The number of staff.
- How their bank views the company?
- How difficult the negotiation is (it can be difficult to get them to agree to receive less money than they are owed)?
In the end, a company’s voluntary arrangement is all about reaching a compromise with the majority of creditors and the stakeholders in the business. Success is more likely if the company has good financial records and can prove that it can survive and be profitable in the future.
However, where the creditors are aggressively pursuing their debts via legal actions, a CVA is less likely to work. Statistics show that taking acting as early as possible is always the best course of action, as that way any creditors are less likely to have built up a head of steam.
For more information please see: https://www.antonybatty.com/company-voluntary-arrangement/guide-cvas/