When a firm faces difficult trading conditions it can be tempting to simply liquidate the business and walk away however a Company Voluntary Arrangement or CVA is a method of allowing the business to continue to trade but still receive the benefits of relief from creditors and onerous contracts.
A company might have a very strong business but be weighed down by debts and face the prospect of continuous action from creditors. Sometimes it can seem like the directors spend more time firefighting than actually running the business.
In a CVA the directors of a business agree payment terms for their current debts with creditors that ensures that businesses get their money albeit over a longer timescale, but also that the firm can move on and thrive.
The key benefit of a CVA as opposed to Administrative Receivership is that the directors retain control of the company throughout the process. The executives will naturally face a significant amount of work in putting together a realistic and professional CVA proposal but they will still be in charge of the company and will retain that control in the event of a successful CVA application.
Another major benefit of the CVA process is that of time. In a distressed company the directors are constantly under pressure to pay bills quickly and can be forced to make decisions that, whilst good from an immediate cash flow perspective are actually counter-productive in the medium term. A CVA allows the business owners to take stock, make a plan and work through that plan without being forced into receivership before it comes to fruition.
Entrepreneurial businesses have a tendency to run in an unstructured and flexible manner. Whilst this has benefits it can also have some significant downsides. As part of the CVA process the directors will need to produce a full and realistic business plan and cash flow forecast. This planning process can be of great benefit as it forces the executives to sit down and realistically analyse the prospects for the business and justify how they think it will fare in the medium term. Research shows that effective planning is one of the key critical success factors for prosperous businesses.
It is also important to recognise that a CVA is often a wake-up call for the owners. A realisation that things have got particularly bad is often the precursor to positive and business like action and directors often find that the discipline of working under a CVA actually makes them better business managers.
Through the CVA process the company can continue to trade without interruption, meaning that employee, supplier and customer confidence tends to be better than under receivership and ensures that the post CVA company has the best possible start.
Whilst the company may have large debts that are repayable immediately or over a short period of time, post CVA the firm will have a debt repayment schedule that will be realistic and manageable, allowing them to repay what they owe over a longer period thus reducing the cash flow burden.
The CVA is a legal agreement. This means that the company must stick to the terms agreed but it also means that creditors cannot take legal action to enforce debts covered under the agreement. Whilst the creditors consider the proposals the company is also under court protection giving the firm valuable breathing space.
Although there will be costs incurred during the process they will be significantly less than those of a receivership or liquidation meaning that the company and the creditors will save money.
Although there may be some bad feeling, a company that engages proactively with its suppliers and keeps them informed throughout the process is likely to end up with a much better reputation than one that simply closes its door or sells into a prepack. The creditors will receive less money than their original debt but it is likely to be significantly more should an insolvent company be wound up.
A further benefit of the CVA option is that personal guarantees are usually not called in meaning that directors won’t have to fund creditor payments. There will also be no reports compiled on the conduct of the director thus reducing the risks of further action.
The option of a CVA is an attractive one for any company going through hard times. It gives the business time to restructure and continue trading, protects jobs and offers creditors a better outcome than winding up.