If you are considering entering into a CVA as an alternative to voluntary liquidation then hopefully this guide should help.
In this day and age, we understand compromises have to be made. In some circumstances, we have found companies are struggling to get out of debt, despite providing an in-demand product or service.
Fortunately Company Voluntary Arrangement (CVA), according to Gov.uk, is an alternative insolvency process to consider.
Five reasons why a CVA could be the right option for you
1. Company Debt Written Off
Once a CVA is completed, a significant amount of the company’s debt is written off.
All formal insolvency processes cause value to be lost, although CVAs lose less than others.
This can help your company to return to trading profitably and grow in the future.
2. Legal Protection From Company Creditors
After a CVA is agreed, the company gets legal protection from its creditors.
The creditors who are included in the arrangement are no longer allowed to take legal action against the company to collect their debts.
In addition any legal actions currently being undertaken must be stopped, such as a Winding Up Petition.
3. Directors’ Conduct Is Not Investigated
Using a CVA means that the company remains a trading entity.
A liquidator is not appointed and there is no requirement for a review of the past conduct of the directors, including possible accusations of wrongful trading.
4. Directors Remain In Control Of The Company
A CVA allows the directors to remain in control of the company.
This is considered one of the most attractive reasons in having a CVA as an alternative to voluntary liquidation.
However CVAs are very flexible and therefore conditions may be added to reach an agreement between both business and creditors, such as changes to the management structure.
5. A CVA Is A Private Agreement
The CVA is private between the company and its creditors, and therefore does not have to be advertised on the company’s correspondence.
However it is recorded on the company’s credit file, meaning it will appear on a credit check.
Five reasons why a CVA might not be the right option for you
1. Poor Credit Rating
An agreed CVA can lead to a lower credit rating, which remains on record for six years.
This can make it difficult to get new credit funding. It is costly to set up and not a recommended process for small companies.
2. Alarming Potential Clients
A CVA may jeopardise new business relationships.
Potential clients may carry out a credit check as part of their due diligence, and discovering a CVA can be a red flag.
3. Company Restructure
Often a CVA is implemented due to a weak company structure.
As a result, there may be a need to cut out less profitable areas of the business in an attempt to save costs.
This may mean cutting staff. Tight cashflows can result in opportunities lost and losing customers.
4. If A CVA Fails The Company May Close
Before agreeing the terms of a CVA, the directors must be satisfied that the required payments can be met.
From a legal standpoint, it is not easy exiting a CVA early or changing its terms, according to Thomson Reuters.
If the agreement fails, the company is likely to be closed and could leave the directors personally liable for company debt.
Directors can not disclaim onerous property, such as leases. Landlords have to be persuaded to accept a surrender, which can be costly.
5. No Mandatory Changes To Company Management
When a CVA is implemented, Creditors may or may not insist on changes to the management structure.
If unchanged, there can be a risk of continuing bad management practices, which may have been the primary cause of the company’s past failures.
CVA as an alternative to voluntary liquidation – a summary
You may be a business investigating various insolvency processes in an attempt to find the right one.
Financial Discuss are renowned for our experienced advisors and fast and effective service.
Whether a CVA is right for you will depend on where you want to take your company. In many cases, we have found that CVA appeals to companies looking to continue trading.
However, this only works when the company is making enough profit to meet their historical debts.
Often there can be restructuring situations with a focus to become more streamlined which should help lead to becoming a profitable company, especially as the onerous costs have been stripped out.
Remember these might be more or less relevant to you and your company depending on your circumstances. Contact us for a free consultation.