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The Advantages and Disadvantages of a Company Voluntary Arrangement (CVA)

A Company Voluntary Arrangement (CVA) is a formal insolvency procedure that allows a company to reach an agreement with its creditors to repay a portion of its debts over time.

While a CVA can be a lifeline for struggling businesses, it’s essential to understand its benefits and drawbacks.

This article explores both the advantages and disadvantages of a CVA, how it affects your company’s credit rating, its duration, and compares it to administration.

Advantages and Disadvantages of a CVA

Advantages of a CVA

Business Continuity

A key advantage of a Company Voluntary Arrangement is that it allows the company to continue trading while repaying its debts. This continuity helps preserve the business’s reputation, customer base, and employee jobs.

Debt Restructuring

A CVA enables the restructuring of debt, making repayments more manageable. This can provide the necessary breathing space for the company to stabilise its finances and improve cash flow.

Protection from Legal Action

Once a CVA is in place, it provides protection from further legal action by creditors. This means that creditors cannot pursue further legal claims, giving the company time to reorganise and recover.

Debt Restructuring

A Company Voluntary Arrangement enables the restructuring of debt, making repayments more manageable. This can provide the necessary breathing space for the company to stabilise its finances and improve cash flow.

Retained Control

Unlike administration, the existing management retains control of the company during a CVA. This can be crucial for implementing effective recovery strategies and maintaining morale within the organisation.

Improved Creditor Returns

Creditors often receive a better return through a CVA compared to liquidation.

By agreeing to a CVA, creditors can recover a higher percentage of their debts over time, making it a mutually beneficial solution.

Pros and Cons of a CVA

Disadvantages of a CVA

Impact on Credit Rating

A CVA can significantly impact a company’s credit rating.

When a CVA is agreed upon and implemented, it is publicly recorded, often resulting in a lowered credit score.

This can affect the company’s ability to obtain credit in the future, as lenders and suppliers may view the business as high risk.

Duration of the Arrangement

The duration of a CVA typically ranges from 3 to 5 years, depending on the terms agreed upon with creditors.

During this period, the company must adhere strictly to the repayment plan.

Failure to comply can lead to the termination of the CVA and potentially force the company into administration or liquidation.

Creditor Cooperation

A CVA requires the approval of 75% of creditors by value.

Securing this level of support can be challenging, especially if creditors believe they would receive more in an alternative insolvency process.

Legal and Professional Fees

The process involves significant legal and insolvency practitioner fees, which can add to the financial burden of the struggling company.

These fees must be considered when evaluating the feasibility of a CVA.

Operational Limitations

The company may face operational restrictions imposed by the terms of the CVA, limiting its ability to make strategic decisions without creditor or practitioner approval.

This can hinder the company’s ability to adapt quickly to changing market conditions.

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What Does It Mean if a Company is in a Voluntary Arrangement?

Entering a Company Voluntary Arrangement indicates that the company is experiencing financial distress but seeks a structured solution to repay its debts.

The company continues to trade under the terms of the CVA, under the scrutiny of an insolvency practitioner.

This status can affect the company’s reputation and business relationships, making it challenging to attract new clients or investors.

If you want to understand the CVA process, here’s a link to an article on it.

What is the Difference Between Administration and Company Voluntary Arrangement?

Administration

  • Purpose: Administration is a rescue mechanism aimed at saving the company as a going concern or achieving a better result for creditors than immediate liquidation.
  • Control: An administrator takes control of the company to restructure or sell its assets.
  • Outcome: It can result in the company being sold, restructured, or liquidated.

Company Voluntary Arrangement (CVA)

  • Purpose: A CVA allows the company to repay creditors over time while continuing to trade.
  • Control: The existing management retains control, working to repay creditors under agreed terms.
  • Outcome: It is less disruptive but relies on creditor cooperation and the company’s ability to generate sufficient revenue to meet payments.

Conclusion

A Company Voluntary Arrangement (CVA) offers a structured way for a company to manage its debt and avoid liquidation, providing advantages such as business continuity and debt restructuring.

However, it also comes with disadvantages, including a potential negative impact on credit rating, the need for creditor cooperation, and operational limitations.

Understanding these factors and comparing CVA to administration can help businesses make informed decisions about their financial future.

Seeking professional advice is crucial to determine the best course of action for your company’s unique circumstances.

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    Andy Slinger

    Andy is Head of Marketing for Business Helpline with a wealth of experience Marketing in the financial sector. He has a passion for helping business owners struggling with debts.