What are the advantages of a Company Voluntary Arrangement (CVA)?
After determining that opting for a Company Voluntary Arrangement (CVA) is the most suitable strategy for a company, it becomes essential to generate future cash flows to verify the feasibility of the CVA. In times of financial distress, many UK companies find that pursuing a CVA offers more advantages than disadvantages, making it a preferred choice for sustaining operations. Here, we outline what is widely regarded by professionals as the primary benefits of a CVA.
1. Continue Trading
As highlighted, the foremost advantage lies in a CVA enabling a company to persist in trading, even if a creditor has publicly filed a petition against the company. Given that bank accounts frequently face freezing upon the publicity of a creditor’s petition, the postponement can also facilitate securing a validation order. This allows the reopening of accounts, ensuring that business operations can resume without disruption.
2. Maintaining Control
In contrast to alternative choices when a company faces insolvency, a CVA provides the opportunity for directors/owners to sustain trading while retaining control of the company. Under a CVA, there is no inquiry into the directors’ conduct, granting the company the freedom to carry on with its daily operations during the restructuring and trading phases. This proves crucial in numerous specialised industries, as the individuals with the most profound knowledge of the business – the directors and/or owner – can continue steering the company.
3. Freezes Interest and Charges
Frequently, companies opt for CVAs as they enable the retention of specific contracts and accreditations that might pose challenges in transferring to another company. Examples include electrical contractors’ certification and HGV licenses.
4. Knowing exactly where you are
In business operations, having a well-defined structure is crucial, and the same principle applies to the CVA process. Once the actual process commences, all activities unfold within a predetermined timeframe. For instance, a Company Voluntary Arrangement typically entails a three or five-year repayment plan, although it can be more adaptable based on a financial forecast. If the company surpasses the forecasted revenue, payments may be adjusted accordingly. Nonetheless, directors have a clear understanding of the required payments and the associated time constraints. In essence, everyone operates more efficiently when they have a clear grasp of the situation.
5. Terminating Leases and/or Contracts
Among the more obscure advantages of a CVA lies in its less specific inclusion in the official ‘Rules,’ as government guidance was somewhat ambiguous on this matter. However, case law from the mid-1990s provides clarity on how and when leases and contracts can be terminated. Contrary to a common misconception, individuals can indeed terminate contracts, leases, supply agreements, or even employment contracts when seeking to reduce costs under a CVA. A knowledgeable Insolvency Practitioner or business rescue professional can reference case law examples such as Cancol Ltd (1995) BCC 1133, wherein it was determined that the term ‘creditor’ encompassed landlords.
6. Reduction of Debt Owed
There exists a significant amount of confusion surrounding debt reduction, but a well-structured CVA can help dispel some of these misconceptions. Initially, many companies approached Vanguard Insolvency with the belief that they would be denied credit after making a partial payment agreed upon in the CVA creditors’ meeting. This notion is not accurate. It’s important to acknowledge that while a business’ suppliers may not be entirely pleased with receiving less than the full amount owed, they may still rely on the business just as much as the business relies on their supplies. In many instances, we have observed that suppliers are often willing to continue business relationships with companies undergoing a CVA, although they may request pro forma or cash on delivery payment terms.
7. Allows for Restructuring of Business Model
A Company Voluntary Arrangement not only provides the opportunity to ‘buy time’ for restructuring the business model to regain profitability but also grants directors the added advantage of having a professional business rescue team available to assist in formulating a viable plan. This proves to be one of the most valuable benefits of a CVA, offering professional assistance in restructuring the business model while allowing directors to focus on their core strengths – managing day-to-day affairs.
8. Improved Cashflow
Surprisingly, the fees for a CVA are not as steep as one might assume, and interestingly, a significant portion is covered by the creditors. A well-crafted voluntary arrangement can notably enhance cash flow through various means, with a primary focus on engaging with creditors to accept a percentage of the owed amount over an extended period. This approach facilitates the freeing up of funds for use as operating capital.
Facing insolvency naturally raises concerns, but in numerous instances, a properly structured Company Voluntary Arrangement emerges as the most advantageous course of action to sustain business operations. The initial stages may involve some stress as negotiations unfold on your behalf. However, once the CVA is finalised and approved, the experience tends to be less arduous than anticipated. You retain control of your company throughout the process, and in most cases, a complete turnaround can be anticipated .
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I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.