Company Voluntary Arrangements (CVAs) are one of a number of insolvency solutions available to directors when dealing with company indebtedness. In summary, a CVA is a formal payment arrangement between a company and usually all of its unsecured creditors. It is an ideal solution where a business is trading profitably but has a large amount of legacy debt it cannot repay. If approved by creditors, a company will typically make monthly contributions into the CVA out of its profits, for up to 5 years, and usually some of the debt is written-off at the end of the term. In sectors such as retail, CVAs are often used as a tool for restructuring lease terms and rental payments with landlords and there have been many high-profile examples of this including Arcadia Group and New Look.
Despite their apparent attractiveness, CVAs are far less common than voluntary liquidations or administrations. During the period January to March 2020 for example, there were 69 CVAs compared with 2,708 Creditors’ Voluntary Liquidations (CVLs) and 404 administrations. There are many reasons behind this. For directors, the options of a “pre-pack” administration or liquidating their existing company and starting afresh through a new vehicle, having bought back the assets, is often seen as more attractive than being committed to a payment arrangement for up to 5 years.
Also, whilst in a CVA, the company will have a very poor credit profile, meaning it is unlikely to be given credit terms by suppliers and it will be prohibited from borrowing further money, including via an overdraft facility, whilst the CVA remains in place. These issues often result in further cash flow pressures and as a result, a significant proportion of CVAs end up failing well before the end of their term. These failures can also reflect a reality that the business may not be as profitable as the directors thought, or that fundamental structural issues remain. In some cases, simply being in a CVA has itself caused a loss of trade. Far better a clean start, many would say.
However, the post COVID-19 landscape may well present a different perspective, enabling CVAs to come to the fore. Many businesses that are fundamentally sound and who will be able to recover their profitability, once the worst effects of the Pandemic are over, may also be hampered by significant legacy debts. Where these debts cannot be properly serviced or refinanced, a CVA could be the most suitable solution to ensure the business survives. In these scenarios, the main advantages of a CVA are that the business avoids the disruption of a “pre-pack” solution and the directors/owners would not require fresh working capital in order to buy-back company assets.
Given the backdrop of the Coronavirus, HMRC and other creditors may also end up being more sympathetic towards companies caught in a debt trap that is not of their own making and for whom a CVA represents an important lifeline. Nevertheless, the fundamental principle remains that a CVA is only suitable if the business is structurally sound and is making and will continue to make cash profits for the duration of the arrangement.
You can read more about CVAs here: https://bridgewood.co.uk/insolvency-help/cvas-a-basic-guide/
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