CVAs (Company Voluntary Arrangements) become increasingly acceptable to creditors

CVAs (Company Voluntary Arrangements) become increasingly acceptable to creditors

Many large public interest companies in the UK plan to resolve its financial difficulties by agreeing a Company Voluntary Arrangement (CVA) with its creditors.  The CVA route  allows large public interest companies to make cost cutting changes, and gain the support of its creditors to survive.Yet more evidence that creditors are starting to understand the value of CVAs for restructuring struggling companies.

In a nutshell, a CVA is an agreement where a company’s creditors decide to accept reduced payments and write off debt. This releases the burden of debt on the struggling business and frees up cash to enable it to continue to trade. As a result of the CVA, creditors not only agree that they will write off a certain amount of the money that they are owed. They also have the opportunity to continue to trade with the company into the future. This is certainly a better prospect than the total failure of the business and the likelihood that there will be no returns for creditors at all.

As with many corporate rescue solutions, CVAs have attracted some criticism. Creditors argue that they are forced to accept the terms of a CVA because if they do not, they are threatened with the closure of the company and that they will be left with nothing. In fact, this argument is flawed because a company would only consider a CVA in the first place if it is struggling to repay its debts and facing liquidation. If this situation were allowed to happen, the creditors would lose everything anyway.

A Company Voluntary Arrangement is designed to save the business and at least get some return for the creditors. It is not a method of simply avoiding paying the company’s debt. An additional benefit over alternative business rescue solutions such as pre-pack liquidation is that the CVA is seen as a more consensual measure. It requires the approval of 75% of the value of voting creditors to be accepted and set in place. Without this, the CVA cannot be implemented.

Company Voluntary Arrangements are most often used by retailers to reschedule their debts and close underperforming stores. Recently there have been a number of high profile retailers who have used the CVA solution. However, the CVA solution can be used by any struggling business which needs to renegotiate the debt it owes to its creditors in order to survive.