Whilst there are many advantages to adopting a Company Voluntary Arrangement, there are also a few disadvantages that can usually be overcome by expert practitioners, such as Cashsolv, but they do need to be considered at the outset before any final decision is made.
The focus of the CVA is to build a viable business. Monthly payments must be affordable, adhered to and paid promptly, as well as trading operating costs being controlled and kept low to ensure future profitability. Following the implementation of a Company Voluntary Arrangement, some suppliers may try to increase their prices, or re-negotiate credit terms voiding previous agreed discounts in an attempt to regain debts owed to them.
It is possible to push back against these pressures, but realistic future cashflow forecasting from expert practitioners will ensure you are not setting yourself up for a fall.
Key disadvantages of a Company Voluntary Arrangement include:
In the first instance it is important if possible that all of the directors agree that a Company Voluntary Arrangement is best for the company. When there are a number of directors involved, it is a board decision that can be by majority vote, but typically unanimity is best. To achieve unanimity, it is important to recognise that each director may each have their own ideas on how to resolve the situation and will want to be heard and have their proposals considered.
An experienced practitioner can assist in this situation by teasing out the issues and facilitating constructive debate, whilst acting as an intermediary with the best interests of the company in mind. At Cashsolv our practitioner’s years of experience ensure that we are able to advise on all the benefits and disadvantages of a Company Voluntary Arrangement and take into account any valid objections and deal with any specific problems that need to be overcome as part of the decision making process.
It is important in this context, not to make assumptions as to the barriers that might exist and not to make a decision without full discussion. Over the years we have come across most problems that might arise and found workable solutions, but every Company Voluntary Arrangement must be individually designed to suit the specific circumstances.
Once the directors and your Cashsolv nominee (insolvency practitioner) agree to a CVA being the best route, then you also need 75% by value of debt of the creditors that vote to be in favour and 50% of shareholders. It is therefore important as part of the implementation plan, for your nominee to be able to overcome any objections and convince these stakeholders that they will be better off as a result of a Company Voluntary Arrangement as compared to any alternative.
If one of your creditors makes up a large percentage of the overall debt owed, they are in a strong position to negotiate the terms of the Company Voluntary Arrangement. This is a disadvantage if the creditor is unrealistic, but is also means that they have the most to loose.
HMRC can be the most difficult creditor to get on board, as they do not operate on a totally commercial basis. First of all, they consider themselves an ‘involuntary’ creditor. I.e. they did not choose to provide credit. To a large extent any HMRC debt arrears will have arisen without them being able to prevent them from being incurred. Accordingly one of their ‘unique’ concerns is whether they are likely to incur further losses as a result of their position, of not being able to prevent new debt arrears being incurred and not being able to collect the debt until after it has been incurred.
The second issue that applies to HMRC is what they call ‘compliance’. They are less likely to support a Company Voluntary Arrangement if there are outstanding financial accounts or PAYE or VAT returns. They rely on these documents to be able to calculate the amount of TAX or VAT due to them and without the accounts and returns being brought up to date, either before or as a term of the CVA, they may vote against even an otherwise commercially sound proposal.
As HMRC are involved in nearly all CVAs as a creditor they have become pretty used to the issues involved and follow a fairly standardised approach. We can usually tell in advance the likelihood of getting their support, and also how to overcome their objections.
This is hardly surprising. Particularly if a proportion of the debt due is being written off, but in fairness, the credit rating was probably not great anyway. Obtaining future credit, from new suppliers may be an issue even past the term of the Company Voluntary Arrangement.
However, a clear payment history during the Company Voluntary Arrangement will reflect favourably upon your businesses and demonstrates a willingness and ability to pay debts. Poor credit rating can lead to cashflow problems, however, here at Cashsolv we have a variety of cashflow solutions and services available to help provide the funding and stability that you need when it seems like no-one is on your side.
Secured lenders, such as the bank, are not bound by the terms of a CVA and can therefore still take legal action against your business. However, they are normally happy with a Company Voluntary Arrangement as long as their debts are being paid. They also usually hold guarantees from the directors. Although the CVA does not usually result in any debt to the bank being reduced, the debt can normally continue to be serviced by the company and therefore the guarantees are not likely to be called upon.
The biggest challenge to the CVA process is making sure that a business that may have been making losses, is able to change its business model and become profitable. Whilst writing off debt and repaying a proportion of debts over an extended period will improve the businesses cashflow, long term sustainability is based on profitability. A Company Voluntary Arrangement will provide a breathing space for the business to make changes to achieve profitability, but it is up to the directors to ensure any required changes are implemented.
One of the weaknesses of the CVA process is that the advantage that the existing directors remain in control, also means that once the CVA has been approved and the immediate pressure has been relieved, it is easy to continue bad habits or fail to implement the necessary changes. Good planning and forecasting carried out as part of the CVA process can ensure that a CVA is a proactive step towards creating a viable and successful long term business.
Whilst the above disadvantages need to be duly considered, they are by no means factors that cannot be overcome. As expert practitioners, we have experienced many successes in implementing CVAs and will only recommend the right route for your individual circumstances.
Most of the ‘usual’ reasons for not doing a CVA have been overcome many times in the past, and there are a number of ‘tools’ that have been designed through practice and experience that help. We have typically found that once the CVA has been designed and approved by creditors, it effectively goes off the radar as far as day to day business is concerned, but with the massive benefit of having a debt restructuring in place that is affordable.
If you are considering a Company Voluntary Arrangement for your business then contact us now for immediate confidential support and advice.
For further information, download our Guide to the CVA process or view our relevant pages: