When enlisting the services of an insolvency practitioner to solve your company’s financial woes, you will have a series of options depending on your situation. Oftentimes, company liquidation will be put forward as the best solution, one capable of upholding obligations to creditors, while also putting a decisive end to debt issues.
However, company liquidation is not always the best solution. For some companies, the best solution is one of the two major alternatives to liquidation: a Company Voluntary Arrangement (CVA), or administration. Although these two procedures may seem similar at first glance, they are, in fact, quite different. In this article, Clarke Bell will discuss these procedures, highlight the differences, and detail how each procedure could be useful to you.
What is a CVA?
A Company Voluntary Arrangement is a formal procedure that aims to open a dialogue between a company and its outstanding creditors. The aim of this dialogue is to renegotiate repayment terms, resulting in a new agreement between the company and its creditors. If successful, this new agreement will ensure creditors are repaid, while giving the company the opportunity to continue trading as normal, with the current directors remaining in control.
Effects of a CVA
A CVA will have several effects on a company, depending on whether an effective agreement is reached or not. Assuming a company’s directors can negotiate a new set of repayment terms, then the company may continue trading as it normally would. The company will have no additional requirements or obligations, and will need only keep to the new set of terms as agreed upon during renegotiation. Moreover, a CVA is not likely to have much of a ripple effect, if any at all, with external parties. Suppliers will likely continue working with the company, the public isn’t likely to form a negative opinion, and so on. In essence, a CVA has very little effect on the functions of the company, provided it sticks to the agreement.
Role of the insolvency practitioner in a CVA
As directors retain a vast degree of control over the company and its operations, the insolvency practitioner’s role in a CVA is quite limited. The main responsibility of an insolvency practitioner in this procedure is to help negotiate a new set of repayment terms and ensure both parties stick to them. Once an agreement is made, both parties already have a crystal clear picture of what is expected; directors know when repayments must be made, and creditors know that they cannot pursue further action for the duration of the CVA. This includes creditors that voted against the CVA during negotiations.
If the company is still struggling despite the new terms outlined in the CVA, then the insolvency practitioner can offer advice on how to proceed. This could amount to restructuring the company, or highlight other options that could be taken in the future.
What is company administration?
A company administration is a formal procedure with the similar aim of helping a company address its financial problems and remain in operation. The procedure can be initiated voluntarily by directors, who will appoint an insolvency practitioner to the role of administrator. The main goal this administrator will pursue is revitalising the company, typically by means of implementing a thorough business rescue plan that can help turn the company around. If this is not possible, then the administrator will consider other options, such as selling the company as a “going concern” to recover some investment, or closing the company through a liquidation procedure.
Effects of a company administration
A company administration has various effects that differ from a CVA considerably. Most notably, a company administration can have sweeping effects on public perception, and even relations between a company and its suppliers. Although it has had some reforms and new regulations applied, administration still carries a negative connotation with the public, with some viewing it as an attempt to escape debts. Additionally, suppliers can view administration as a considerable risk, especially if cash payments for goods or services are not possible.
In addition to the possible development of a negative perception, administration will likely cause a reduction in trade. While this reduction can be partially due to the aforementioned negative perception, it is more likely to be a purposeful move on the part of the insolvency practitioner. During administration, the insolvency practitioner must act with the interests of creditors in mind. As such, they are likely to only approve transactions that have a tangible benefit for the company and its creditors. These two main points can cause trouble for a company, even if recovery is possible.
Role of the insolvency practitioner in company administration
The insolvency practitioner’s role in company administration is much more involved than in a CVA. Firstly, unlike in a CVA, the insolvency practitioner will take control of the company, ensuring they can properly carry out their responsibilities. Once in control, the insolvency practitioner will decide what course of action is appropriate; whether this be to continue trading in some form, attempt to sell the company, or place it into liquidation. This isn’t to say that company directors will be left in the dark, but they won’t be able to exert any influence over the final decision.
In addition to managing the company and attempting to solve its financial problems, the insolvency practitioner will have another responsibility to fulfil – investigation. The insolvency practitioner must open an investigation into the conduct of company directors to assess what hand they had in the company’s financial decline, if any. Should any directors be found to have engaged in wrongful trading or misfeasance, such as defrauding creditors, then a report will be made to the Insolvency Service. They will decide what penalties should be applied, if any are appropriate.
Let Clarke Bell help
If your company is in a difficult financial position, don’t struggle alone; let Clarke Bell help. We have more than 28 years of experience in helping companies find the best solutions for their situations, and we can do the same for you. Don’t hesitate to contact us today for a free, no-obligation consultation and find out exactly what we can do for you.