Can a Company Recover from a CVA?

COMPANY DEBT ANALYSER

Can a Company Recover from a CVA?

What are the Barriers to a Successful CVA?

To answer this question it is important to understand why a CVA is proposed and what will be the barriers to it succeeding. CVAs are not the solution in the majority of cases involving insolvent companies.

Successful Underlying Business

Fundamental to any company surviving a CVA is the need for there to be an underlying successful business. A CVA is not for a badly managed company that has no financial controls or does not understand its market or its customers’ future needs. It is not for a company that believes that a CVA will make all its past problems go away.

Catastrophic Events – such as COVID 19

A CVA may be appropriate to consider where there has been a catastrophic event that could not have been foreseen or planned for. There is a good underlying business and had it not been for the event, the company would have continued to trade successfully. Examples may be a fire or a very large bad debt. Both examples will have a significant effect on cash flow and a CVA can help relieve some of the immediate pressure.

Accreditation and Licencing

A CVA can be considered where the company has to survive and not just the business. Remember, there is a difference; a business sits inside a legal entity called a company.

Many business sectors require some form of accreditation or licencing. These can take many years to acquire and without them there is no business. Who holds the accreditation or licence? It is the company.

If the company goes into Liquidation or Administration they are lost and the business dies.

Customers

A company’s customer basis may be sensitive to dealing with a newly incorporated phoenix company whose business has been bought out of Liquidation or Administration. The fact that a company has entered into a CVA may not come to the attention of a customer, bear in mind that there is no requirement to tell customers.

Customers’ reactions must however be carefully considered and managed. Customers will remain loyal if they believe that there will be a continuity of supply and that there business will not be affected by one of their suppliers entering into a CVA.

Creditors

It will be the creditors who decide whether a CVA is approved or not and ultimately they will be a large factor as to whether the CVA is a success. Therefore a big consideration in the success of a CVA is how creditors have been treated in the lead up to the CVA. If there has been a string of broken promises, bounced cheques or no returned telephone calls, there is every likelihood that the CVA will not be successful. It is therefore essential that if a CVA is considered viable it is done sooner rather than at the last minute when creditors have had enough. This is particularly true of HMRC.

Understanding Cash Flow Needs

In all CVAs, the directors need to understand that it is not an easy option. The biggest issue is cash flow funding going forward. Most, if not all suppliers, even if they support the CVA, will only deal going forward on a cash on delivery or pro-forma invoice basis. This can continue for up to a year before credit terms are offered again. In addition, it is possible that all pre CVA debtor receipts will have to be paid into the CVA fund and therefore not available to company going forward, resulting in more pressure on cash flow.

Management

As stated above, a CVA is not an easy option and the company must have the quality of management to see the successful implementation of a CVA. The stress and pressure on management during the CVA process cannot be underestimated and only the strongest of management teams will be able to steer the company through a successful CVA.

Summary

So, in summary, the key elements that determine whether a company can recover from a CVA are:

  • Is there a good underlying business worth saving?
  • What are the reasons for considering a CVA? If the question “What’s new?” cannot be answered satisfactorily, then maybe a CVA is not the solution.
  • Is there an accreditation or Licence to protect? For example an Operator’s Licence in the haulage industry,
  • What will be the reaction of customers?
  • What will be the reaction of suppliers?
  • Has a detailed future cash flow been prepared and can the trading of the company post CVA be funded?
  • Strong management.

If the answers to the above points are positive, then there is reason to believe that any CVA proposed has very good chance of being successful.

Take Advice

If you think a Company Voluntary Agreement is the step to take for your company, the main thing you need to do is seek professional advice.

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