What is a CVA and why should you avoid them?
What is a CVA?
A Company Voluntary Arrangement (CVA) is a legally binding agreement between a company and its creditors. It requires the company to pay back its debts over a set amount of time, usually 3-5 years. It does allow the company to continue trading, but there can be serious repercussions if payments are not made.
They require 75% of creditors (by value) to be in favour, and a licensed Insolvency Practitioner will manage the CVA. They often seem like a good idea at the time, but, depending on the arrangement, they may leave your company in an unfavourable position. Below are a few of the key reasons you should avoid a CVA…
A CVA is formal and inflexible
A CVA is a legally binding agreement; as a result, there is not much room for manoeuvre. You can seek adjustments; however, creditors do not have to agree to anything. The agreement can be quite strict regarding payments and length of time. A more informal and flexible approach provides your business with more options.
Failure means further insolvency measures
If you do not keep to your side of the arrangement, you will face further insolvency action. The most likely next step is for creditors to force your company into liquidation. If this happens, the company is shut down and assets are sold to pay creditors. If you have signed personal guarantees, you will be asked to pay these back. It also opens the company and directors up to investigation.
Credit rating is affected
A CVA is a formal insolvency procedure and as such, your company’s credit rating will suffer. This could be particularly harmful if debts have already hurt your credit score. Ultimately, this means that obtaining credit from suppliers will be challenging. This may result in suppliers asking for payment in cash. If you are in a CVA, it is likely the company may be experiencing cash flow issues, so this may make a difficult situation even worse. This can also continue for several years after the CVA has ended.
It does not include secured creditors
Lenders with security over a loan are not included in a CVA. This means that they can still take action to recover debts. This should not be an issue if you continue to pay them. However, if they hold security, such as a personal guarantee, you could be personally liable. You could end up between a rock and a hard place if you can’t pay both.
There are always alternatives
Many companies will tell you that a CVA is your best option. This is not true. At Bell & Company, we always recommend avoiding formal insolvency. We work to provide alternative solutions that are informal but enforceable. These give you the best flexibility to get your company finances back on track. All the while ensuring that all parties stick to their side of the agreement.
If your business is in financial difficulty or you are considering entering into a CVA, contact us today. Every case is different, and we can help you find the best option to help your business recover whilst protecting your personal finances. Call us on 0330 159 5820 or email [email protected] to discuss your options with one of our specialists.
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