Should You Go Into A CVA?
As my last article touched on the high failure rates of CVA’s, it would be fair to assume that you may believe that I am against the process completely. However, whilst I am not generally a fan of CVA’s as the primary insolvency process to turnaround failing businesses, I still believe that they have their place and are a useful tool if certain criteria are met. Therefore, this article seeks to provide you with the top ten indicators of when a CVA is appropriate, in order that you, or your client, can properly consider the CVA process as an option if the criteria are right.
See Below For My Top 10 Indicators That A CVA Is Right For Your Company
You can repay your creditors if given time.
The first point sounds like I’m teaching you to suck eggs however this point is the basis upon which a CVA can be agreed, as 50% of the creditors who vote, must agree to your repayment proposals. Therefore, if there are debtors to collect, assets to sell or good profits forecasted, this makes a CVA far more likely to be viable.
You wish to repay your creditors and save the business.
If your business is your baby, or if you are amongst the few who value your moral obligation to repay your creditors ahead of any other factors then a CVA is a good choice for you. I say this because, in many instances, you can be personally better off financially through other processes so you must be aware of this and still be happy to commit to a formal agreement to repay your creditors often ahead of personal financial gain.
You have received a winding up petition but believe your business is generally sound.
If one or a number of your creditors have issued your Company with a winding up petition then you can stop the petition in its tracks on the grounds of your intention to propose a CVA then dismiss the petition if the CVA is agreed therefore providing a solution to an immediate problem.
You are up to date with your current creditors.
If you are keeping up to date with your current creditors (and in particular your taxes) but have historical debts which are weighing you down then a CVA may be a good pick as it allows you to formalize a repayment plan on the historical debts rather than have to pay them all in one go now or risk the historical creditor reneging on your repayment agreement.
Your suppliers would support you during a CVA.
If you have a bad relationship with your suppliers or couldn’t source your supplies elsewhere then you may wish to avoid a CVA as suppliers can often withdraw credit terms or stop supplying companies in CVA.
You wish to avoid a report on your conduct as a director.
If you have had previous failures or if you are unsure as to how your conduct of your insolvent company may be considered then a CVA is a good tool as there is no report on your conduct as a director. This obviously avoids the risk of the Insolvency Service wishing to take disqualification proceedings if your conduct is considered wrongful or fraudulent giving you time to correct your mistakes.
You wish to retain complete control of the running of your Company.
If you are concerned that you customer relationships would be damaged or that an Insolvency Practitioner controlling your trading would be detrimental to the bsiness then a CVA may be the right option as complete control remains with you. You do however have to comply with the terms of the CVA proposal and therefore this means providing annual accounts to the Supervisor for review and maintaining current liabilities without fail.
HMRC are not your only/or majority creditor.
As your creditors must vote through a CVA, if HMRC have a claim which is disproportionate to your trade creditors or a history of poor payment then they are likely to reject the CVA proposals. Therefore having multiple creditors at similar debt ages and percentages of the total debt will help avoid any one creditor having the casting vote on the proposals and may ensure that a CVA is easier to obtain.
You are unable to raise finance to pay your creditors.
One way of supporting cash flow, other than an injection of funds, is to delay the payment of the creditors, therefore if no injection of funds can be raised, cash flow can be helped with a CVA.
You are a service based business.
In order to get a CVA approved, you often must demonstrate that the return to creditors is better than the alternative processes. Therefore this point is to the extent that it is easier to demonstrate in businesses with no assets as the return to creditors through liquidation is often minimal (or solely reliant on debtor recoveries). This doesn’t however mean that if you are a product based business, a CVA is not an option because many product businesses would still show better returns in a CVA from profits if their assets are likely to diminish in value upon forced sales in Liquidation processes.
To discuss the suitability of a CVA in more detail, give us a call on 0800 612 6197 or see our CVA page here COMPANY VOLUNTARY ARRANGEMENTS