When should I use a Company Voluntary Arrangement

COMPANY DEBT ANALYSER

When should I use a Company Voluntary Arrangement

If your business is failing due to debt which you are unable to pay and you are spending your time juggling creditors rather than running your company, a company voluntary arrangement could be the ideal business rescue solution.

A company voluntary arrangement (CVA) allows a business to continue trading normally while ring fencing its debts within a manageable repayment plan. The company’s creditors agree to receive reduced payments towards the debts owed for a fixed period (normally five years).

At the end of the arrangement, any outstanding debt is written off by the creditors and the company is left to trade on debt free. Creditors are legally bound not to add any further interest or charges during the course of the arrangement.

Often up to 50% of a company’s debt can be written off using a CVA. It is therefore an extremely useful business rescue solution in a number of different circumstances.

Business failing due to debt burden

Where a business is fundamentally sound and would continue to trade profitable if its legacy debt was taken away, a CVA may be the ideal solution.

The company’s creditors will only agree to a company voluntary arrangement if the returns they get are forecast to be more than if the business was simply liquidated. To achieve this, the business must be in a position where it is able to continue to trade profitably if its debts are rescheduled.

No investment cash available

The directors of a business may have considered pre-pack administration (phoenixing) as a way of rescuing their company. However, this solution requires a cash lump sum to purchase the assets of the failing business. Very often such a lump sum cannot be raised. No upfront cash is required to implement a company voluntary arrangement. The agreement is funded through the ongoing trading of the business.

A winding up petition has been issued

If the company has received a winding up petition, the closure of the business can be prevented if a company voluntary arrangement is agreed with the majority of creditors.

It is often HM Revenue and Customs who petition for the winding up of businesses. However, if there is a possibility of agreeing a CVA which will return a sensible amount of the debt owed, HMRC is often supportive of such arrangements.

In today’s current market conditions where trading is difficult and investment cash is not readily available, company voluntary arrangements are being used more and more rescue failing businesses. They are seen as ideal for both a company and its creditors. Creditors receive a higher return than if the company was closed and the business’ cash flow is given a significant boost as debt repayments are significantly reduced.

If you are considering a company voluntary arrangement, as with all company rescue solutions, there is a far greater chance of success if action is taken early. If you feel that your business is in financial difficulty, it is best to take professional advice immediately rather than wait until a winding up petition arrives through the letterbox.

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