There have been various reports in the press about some well-known companies ‘going into Administration’ or ‘entering into a CVA’ – including companies like retailer Toys R Us, Italian food chain Prezzo and fashion brand Select.
As a result, we thought it would be worth highlighting what it means to enter into a CVA and why a company might choose this option.
What is a CVA?
CVA stands for ‘Company Voluntary Arrangement’. It is a process in which a company comes to a formal agreement with its creditors for the repayment of the debts which the company owes. A CVA can be desirable if a company has mounting debts and needs help in delaying, and potentially reducing, these debts.
For a Company Voluntary Arrangement to be put in place, it requires the approval of at least 75% (in value) of the creditors (i.e. the people who are owed money). A CVA can last for any length of time as they can be used for a short-term or a long-term fix; and it must be monitored by a supervisor – who has to be a Licensed Insolvency Practitioner.
A CVA can only be entered into if it is felt that the company can get itself out of debt and will, at some point, become profitable again. If this is not the case, a Creditors’ Voluntary Liquidation (CVL) is likely to be the better option.
What are the advantages of a CVA?
The main benefit is by entering into a CVA a company that is struggling is able to continue to trade whilst dealing with its cashflow problems. This is beneficial to the creditors, employees and the directors of the company.
Other advantages include:
- Cashflow can be improved in a relatively short time-frame
- The threat of a winding up petition can be stopped
- Whilst the CVA is being prepared, pressure from HMRC for unpaid tax, VAT and PAYE is stopped
- The directors, board and shareholders get to continue running the company themselves, albeit under the supervision of their appointed Licensed Insolvency Practitioner
- Where applicable, property lease obligations can be terminated without cost
- The terms of the arrangement are flexible depending on the particular case
- The company’s creditors will also benefit from the CVA as they are likely to get more of their debts back than if the company went into liquidation.
How is a CVA linked to Administration?
When a company finds itself with cash flow issues, there are a number of options that may be available to it – including a CVA or Administration. However, these are different solutions to a similar problem.
Going into administration is when a company becomes insolvent and is put under the management of Licensed Insolvency Practitioners. The Licensed Insolvency Practitioners are appointed as the ‘administrators’ by the courts, creditors, or company directors.
When a company is placed in administration it is protected from legal action by creditors and nobody can apply to wind up the company during the time it is in administration.
The aim of entering administration is to take control of the company’s assets and business to repay creditors as much of what it owed as possible.
For more details about dealing with a company with cashflow problems
As Licensed Insolvency Practitioners, Clarke Bell can advise you which is the best option for your company.
We can provide you with free, no obligation advice.
Contact us today 0161 907 4044 / [email protected]