A Company Voluntary Arrangement is a legal mechanism to save a limited company. It sounds good initially but can be very difficult to achieve. Often a pre-pack Administration or just liquidating and starting again is easier. The main disadvantage to a CVA is that it can go on for five years and fail at a later date and result in an out of control, of the directors, liquidation.
It is easier to list the advantages and disadvantages of a Company Voluntary Arrangement as a list.
- The limited company is preserved.
- You can keep certain company qualifications e.g. accreditations.
- You will probably not breach contracts with customers and you do not need to tell them about the financial restructuring.
- The directors stay in control.
- There is no report to the Insolvency Service on directors’ conduct.
- Often you can keep the same bank account and suppliers.
- It binds all creditors even those that vote against it or have been forgotten about (unless they are of material value).
- The forgiven debt is a windfall and tax-free income.
- The utility companies must continue to supply a company in a CVA.
- It can be hard to get the 75% agreement needed from creditors.
- If there are high HM Revenue and Customs debts, they tend to not favour CVA proposals without a lot of modifications.
- It affects your credit rating and is registered at Companies House.
- There is not protection from legal action when you are trying to get a CVA proposal finalised and sent to creditors.
- They can be approved but fail later (and often do because of 2 or 3 missed monthly payments).
- Most suppliers will only continue to supply you on very tight terms of cash on delivery only.
- They can be expensive to put in place in professional fees.
- CVA’s cannot vary the rights of secured creditors such as factoring companies.