What are the cons of entering into a Company Voluntary Arrangement (CVA)?
The drawbacks of a Company Voluntary Arrangement encompass the challenge of persuading directors to vote in favour of entering a CVA, potential limitations in securing future credit, and committing to a lengthy payment plan that may exert pressure on the company’s cash flow.
Disadvantages of a Company Voluntary Arrangement (CVA)
As highlighted in our discussion of the advantages of a Company Voluntary Arrangement (CVA), it’s important to note that a CVA is not a guaranteed easy process. Timely payments must be made to the supervisor as outlined in the CVA proposal, and efforts may be required to keep operating costs exceptionally low. Setting and adhering to budgets becomes imperative. While the advantages of a CVA outweigh the disadvantages, it’s crucial to recognise that challenges can arise if proper guidance is not followed. Here are some of the main hurdles you may face.
An unrealistic CVA, where monthly payments are set too high in the proposal without thorough future cash flow forecasting, is likely to fail. At Vanguard Insolvency, we pride ourselves on a high success rate for all our CVAs.
1. Getting Directors to Agree
If convincing creditors to approve a CVA seems challenging, persuading your directors to agree that it is the most suitable course of action for your insolvent company can be even more demanding. Despite having a business plan in place, each director is likely to propose their own ‘solution’ to address the current financial challenges faced by the company, leading to differing opinions. However, a highly qualified and experienced Insolvency Practitioner can play a crucial role in overcoming this hurdle by taking control of the meeting and restoring order, preventing what might otherwise become a battle of wills.
2. Procrastination
As a creditor lacks the authority to initiate a Company Voluntary Arrangement, the responsibility falls on the directors to take this step. Unfortunately, many times, they have already attempted (unsuccessfully!) other solutions and, as a last resort, seek the assistance and advice of an Insolvency Practitioner (IP). If you are reading this information, it indicates an awareness that your company is in distress. It is crucial not to delay entering into payment arrangements. There are instances where directors or owners wait so long before proposing a CVA that it becomes challenging, if not impossible, to steer the business back towards profitability. The best advice we can offer to overcome this difficulty is: don’t procrastinate, Act Now!
***The time to act is at the first sign of impending insolvency***
3. Failure to Keep to the Arrangement
Deviation from the agreed arrangements may lead to a recurrence of difficulties. This implies that the payments specified in the arrangement must be paid in full and punctually. While there might be occasional instances of a delayed monthly payment by a day or so, it’s essential to minimise such occurrences. If there is a possibility that the company might miss a payment, communicate with your supervisor promptly to ensure everyone is kept informed.
4. Future Credit May Be Problematic
This could dampen cash flow both during the agreement period and after the arrangements have been fulfilled. However, a factor that might work to your advantage is your payment history. Consistently paying each instalment on time is particularly advantageous for the future. A positive payment history during the CVA reflects well on your company’s commitment and capability to settle its debts. If cash flow becomes problematic at any point, Vanguard Insolvency can provide guidance on finance and funding to assist you.
While there may only be a handful of disadvantages, it’s important to acknowledge that overcoming some of these challenges may not be straightforward. This is where Vanguard Insolvency lives up to its name! As business rescue specialists, we have encountered numerous challenging situations without causing undue alarm. If your business genuinely stands to benefit from a Company Voluntary Arrangement, we will recommend it accordingly. We only propose solutions that are viable for your company in its current state of financial crisis. If a CVA isn’t the optimal choice, we will be transparent about it. Consequently, while these disadvantages should be acknowledged, they are not insurmountable, as we have demonstrated time and again in the past. We only advocate for CVAs with a realistic prospect of success.
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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.