Phil MeekinView Profile
Understandably, given the dire economic circumstances seen in the last twelve years, it has been a boom-time for the insolvency industry. But it’s not all been about job cuts, unpaid creditors and lenders losing out.
Creditors Voluntary Arrangements – a debt repayment method
Creditors Voluntary Arrangements (CVAs) have become a popular instrument to help struggling businesses, particularly retailers, restructure their business while remaining solvent. It allows a company to propose turnaround plans to its creditors while halting any further action from them. If approved, it enables the firm to continue trading with the understanding it repays an agreed percentage of any outstanding debt over a set timeframe.
Some property landlords are less enthusiastic about CVAs, but it is often a better alternative than administration or liquidation. Creditors frequently include landlords, and some of the UK’s biggest have recently found that it is better to receive less than their full entitlement, rather than no entitlement at all.
CVAs can be a useful short-term solution, but you shouldn’t rely on the arrangement alone to solve all your problems. If your business has encountered financial difficulty, there’s likely to be deeper issues which need solving. You’d do best to use the time in the CVA to uncover and address these issues, rather than just hoping the CVA will simply magic away all your problems.
More damaging consequences
Compared to a CVA, the consequences of administration or liquidation can be far more damaging. For example, in either of those processes, the company can quickly lose its value, while job losses and branch closures are often an unfortunate inevitability. Compared to a CVA, administration means the directors must relinquish control of the company and hand it over to the administrators to make the changes they feel are necessary.
The amount of money that can be recovered from a company trading on through a CVA is invariably more than that from a company in administration or liquidation. Depending on your conduct as director, you could face an investigation after the company is liquidated, which in the most severe circumstances, could lead to a ban.
In the past, high-profile companies entering CVAs have included HMV, Debenhams, Blacks Leisure and House of Fraser. The procedure generally allows companies to safeguard jobs across trading stores and support centres while restructuring plans are worked out and debts repaid.
CVAs are a valuable tool rather than a long-term solution. They ensure businesses remain open in the short-term, which is an achievement for some. But businesses requiring CVAs in the first place usually have underlying problems which need addressing. Without CVAs, an insolvent business would either have to apply for administration or liquidation, meaning there could be more drastic, potentially damaging consequences for the company.