If your business is struggling with unmanageable debt but could trade its way out of difficulty if the debt was under control, a Company Voluntary Arrangement (CVA) might be a good option.
Companies experience financial difficulty for a variety of reasons, but in many cases it’s late or non-payment by their own customers that is the problem. By continuing to trade, but under less financially demanding circumstances, you may be able to return to profitability whilst repaying a proportion of your debt. This helps to avoid liquidation, and prevents the common knock-on effect liquidation has on other businesses.
How does a CVA work?
The CVA process begins with a proposal to your creditors to repay a proportion of the outstanding debt over a longer period of time. If the proposal, which must be put together and delivered by a licensed insolvency practitioner (IP), is accepted, your company makes a single repayment each month towards its debts.
This payment is distributed to creditors in the agreed proportions until your obligations under the agreement are met. CVAs typically last between one and five years, and are legally binding for all parties.
Is entering into a CVA the right move for your company?
The fact that a CVA is a legally binding agreement is only one factor that can contribute to its success. You’re afforded more time to repay, whilst also benefitting from the fact that creditors can’t take action against you.
Interest and charges on the debt are frozen, but you must ensure the company can make all the required payments under the agreement as otherwise it’s likely to be wound up by its creditors.
CVAs are generally a good option when a company’s financial problems are clearly temporary, and there is a viable business beneath the debt. Directors remain in control of the company once the agreement comes into force, and can take the business on a different path if necessary.
When might a business choose a Company Voluntary Arrangement?
Unexpected financial difficulty
The turbulent nature of business often leads companies into financial distress - wholly unexpected but potentially disastrous. Company Voluntary Arrangements address the fact that some businesses simply need to ‘ring fence’ their debt in order to survive.
CVA following company administration
In some cases companies enter administration to escape serious creditor pressure, and a Company Voluntary Arrangement is the most suitable option for them in the long-term. In these circumstances CVA provides a clear exit route for businesses to carry on whilst dealing with their debt under the sanction of creditors. The eight-week moratorium period offered by company administration allows the time to assess whether a CVA would work, and for licensed professionals to implement the most suitable procedure.
A better return than liquidation
Another formal insolvency process called Creditors’ Voluntary Liquidation (CVL) may also be considered, and this involves the closure of a business. If it’s determined that a CVA would provide a higher return for creditors, it may be chosen as the best route by an IP.
What are the advantages of a Company Voluntary Arrangement?
- As a director, you remain in control of your company
- Interest and charges are frozen
- You can ring fence your debt whilst continuing to trade
- You may be able to terminate onerous contracts that were contributing to your poor financial situation
- Outstanding debts may be written off at the end of a CVA
The support of a qualified accountant is invaluable when you’re in debt, and can make the difference between survival and total decline. Handpicked Accountants have developed longstanding professional relationships with accountants around the country, and will put you in touch with suitable professionals in your area. Please contact one of the team to find out more.