Pros and Cons of a CVA for your Business

A company voluntary arrangement (CVA) is a formal process that allows a company to come to an agreement with its creditors to repay its debts over an extended period of time or on different terms.

A CVA can be a useful tool for businesses that are experiencing financial difficulties and are looking for a way to restructure their debts in order to become financially viable again.

However, it is important to carefully consider the advantages and disadvantages of a CVA before deciding whether it is the right option for your business. Some of the key advantages and disadvantages to consider include:

It’s important to note that while it does suspend legal action, not all businesses will receive agreement for a CVA. This article will outline the company voluntary arrangement procedure, along with the advantages and disadvantages.

Put simply, it is the arrangement of a debt re-payment plan over time with creditors. Debts are paid back from future profits or from proceeds made when disposing of assets.

Advantages and Disadvantages of a Company Voluntary Arrangement

There are a number of advantages and disadvantages of a Company Voluntary Arrangement these include:

Advantages of a Company Voluntary Arrangement

• Director control

While liquidation and administration remove a company director’s powers, you are still entitled to keep control of your company with the CVA procedure. Liquidators and administrators are assigned to recoup as much as possible for creditors, removing your position of power and selling company assets. A CVA allows you to control the business recovery plan and carry out the company voluntary arrangement obligations. You will still have to comply with the terms of the CVA proposal, but you continue to oversee the day-to-day running of the company

• Relief from creditor pressure and legal action

Creditor pressure is one of the most significant signs of financial difficulty, but entering a CVA protects your company from said creditor pressure. A licensed insolvency practitioner will assist your company with the CVA proposal and once the CVA is approved, creditors bound by the proposal cannot take further legal action. For companies that have a viable chance for recovery, this could post the most significant opportunity, as long as you comply with the CVA proposal. Your company cannot be wound up during once the CVA is in place unless you incur further credit or fail to comply with the terms. However, if a winding up petition has been submitted, a CVA could be a better alternative to liquidation for the creditors

• Creditor and company benefit

It will often be the case that if your company enters liquidation there will be insufficient assets to repay any monies to creditors. However, a CVA, when compared to liquidation offers a better return to the creditors. While they still may not receive all monies owed, they can recover more than in winding up. It is in their best interests for your company to succeed and the CVA process can even improve your business cash flow – thus meaning you can recover more for the creditors in the future.

• Avoids liquidation

Speaking of liquidation, the consequences for your company are severe. A company voluntary arrangement allows your creditors to receive payment in installments, and keeps you in control. Liquidation will almost certainly result in a full loss of control as well as your company being completely closed down.

• HMRC Tax and VAT debts included

As long as the initial proposal is reasonable there is no reason why HMRC will not agree to a CVA. As such any outstanding corporation tax, PAYE or VAT debts can be included.

• Legal protection from creditors

Once a CVA is in place the creditors involved must stop all legal actions they are currently taking against the company and are no longer allowed to start new actions. Even a petition for the winding up of a company can be stopped by the implementation of a CVA.

• No investigation of director’s conduct

If a CVA is used the company is not liquidated. As such no liquidator is appointed and no investigation of the conduct of the directors is carried out. As long as the CVA is completed there is therefore no risk of directors being accused of wrongful trading.

• Directors overdrawn current account not called in

If the directors of the company have overdrawn current accounts these can be repaid to the company sensibly over a period of time (often by offsetting the payment of future wages against the account).

• Less damage to your reputation

The CVA procedure may result in difficulties for the company in obtaining credit, but it’s far less damaging for your company reputation than liquidation. If your company were to enter administration, a notice will be placed in The Gazette alerting all interested parties to the insolvency. In doing so, your customers may see this and lose faith in your company, causing further financial problems. However, a CVA is only published at companies house and to creditors, giving your company the time to recover and make the necessary restructuring changes.

While the advantages of a company voluntary arrangement outweigh various other insolvency procedures, there are disadvantages to consider.

Company Voluntary Arrangement Disadvantages

• Issues obtaining credit

Accessing credit from banks and suppliers will become extremely difficult to do, which may have an adverse effect on your ability to trade moving forward with suppliers requiring payment on cash terms. However, this is the trade off against not being able to trade at all in the instance of your company being wound up. Unfortunately if some suppliers are included in the CVA, they may refuse to work with you moving forward and you will need to find an alternative. This can be a very difficult situation where specialised goods or services are provided.

• Company credit rating negatively affected

If a CVA is implemented the company’s credit rating will be negatively affected. This will make it harder for the company to get credit with suppliers and will make it very difficult to borrow extra funds while the CVA is in place. As such suppliers will often have to be paid on a cash basis.

• Potential difficulties with starting new contracts

If a contract with a customer comes up for renewal or the company is bidding for new work, the potential client may wish to carry out a credit check against the business. The result of this will be poor and so may have a negative effect on the company being able to secure such new work depending on the client in question.

• All profits paid to creditors

Any profit that the company makes while in a CVA will normally have to be paid to its creditors. If the business improves and the company becomes more profitable it is likely that the payments into the CVA will have to be increased. As such while the CVA is in place it is difficult for the company to invest in growth for the future.

• Cost burden

Signing up to a CVA is a serious financial commitment as they usually last for 5 years. Failure will often result in the Supervisor of the CVA being forced to wind up the company either with your cooperation or through the courts by way of a winding up petition putting you back to square one. For the CVA to be viable there must be a material change in the trade of the business and you must be able to demonstrate it is the burden of historic debts holding it back, not that it is not currently turning a profit. If the latter is the case it may be more prudent to consider creditors voluntary liquidation.

Read more: Difference between administration and CVA

Advantages & Disadvantages of a CVA

Conclusion

In conclusion, a company voluntary arrangement (CVA) can be a useful tool for businesses that are experiencing financial difficulties and are looking for a way to restructure their debts and become financially viable again. A CVA can provide a way for a business to negotiate better terms with creditors, such as lower interest rates or extended repayment periods, and can help the business to avoid insolvency, such as bankruptcy or liquidation.

There are also potential downsides to consider, including the risk of creditors objecting to a CVA and voting against it, the possibility of a negative impact on the business’s reputation, and the potential for difficult decisions, such as closing some operations or laying off employees. It is important for businesses to carefully weigh the pros and cons of a CVA and to seek professional advice before deciding whether it is the right option for their specific circumstances.