When a company is struggling financially or entering insolvency, then it’s important that they contact an insolvency practitioner, who will advise them on the next steps to take. Two of the options that may be available to them are administration or a CVA. In order to help provide you with a clearer idea of what might be best for your business, let’s take a look at what a CVA vs administration involves, and the pros and cons of each.
What Is A CVA?
A CVA is a binding contract between a company and its creditors that sets out a timeline for the company to repay its debts over a specified period of time. The process requires directors to draft a CVA proposal outlining the contributions that will be made, when they will be made, and cash flow forecasts to support the feasibility of the timeline. The proposal is reviewed by an insolvency practitioner, who acts as nominee, before being filed to the court. After that, it is circulated to creditors, where 75% must vote in favour of it.
What Is Administration?
Company administration is a formal procedure in which an insolvency practitioner is appointed to act as administrator of the company. This involves them taking control of the company in order to facilitate its recovery or sale on a going concern basis, if the business is past the point of recovery. During the administration period, there is an automatic stay against any legal action being taken against the company. The administration comes to an automatic end 12 months after the administrator’s appointment, by which point it’s expected that the purpose of the process will have been achieved.
These are the main differences between a CVA vs administration. However, in order to understand whether a CVA vs administration is the best option for your company, it’s important to be aware of the pros and cons of each.
What Are The Pros & Cons Of A CVA?
CVA’s can be a very successful process for companies that have a realistic prospect of recovering, however as with any rescue strategy can have drawbacks. Let’s take a look at both:
Pros:
- As a director, a CVA allows you to stay in control of the day-to-day running of the company and stay in control of their business recovery plan
- A CVA is not publicly advertised meaning that the company can continue trading
- Creditor pressure is alleviated immediately, and any unsecured debt is written off once the CVA is complete
- Most importantly, the process provides businesses with the breathing space that they need to recover, and the flexibility to do it over a time period that suits them
Cons:
- 75% of creditors need to vote in favour of it
- If the CVA fails then the company may be forced to liquidate anyway
- The company’s credit rating is affected
What Are The Pros & Cons Of Administration?
Administration is a more formal procedure than a CVA, however it is a very effective tool for removing creditor pressure. Let’s take a closer look at the pros and cons:
Pros:
- It provides the best return to creditors
- A moratorium provides an automatic stay against any further legal action being taken against the company
- Administration provides companies with breathing space for restructuring, providing the possibility for the business to survive
Cons:
- One of the major differences between a CVA vs administration is that with administration, an administrator rather than the director, is placed in control of the company
- Administration can be a costly procedure, as fees are paid to the administrator, on top of legal fees
- The administration is advertised in the London Gazette and so could cause the company’s reputation to suffer
When choosing between a CVA vs administration, there isn’t a right or wrong answer. Ultimately, it depends on the individual circumstances of the company, however there are some general guidelines to keep in mind.
A CVA is suitable for a company that is financially viable going forward but is currently burdened by debt i.e companies that have a realistic chance of recovery, based on cash flow forecasts and other detailed predictions. Administration on the other hand, is suitable for companies that are under severe financial strain, and need urgent protection.
Our experienced team of business turnaround specialists and insolvency practitioners can advise you on the best options for your company, whether that’s a CVA vs administration, liquidation, or other business rescue strategy. Please don’t hesitate to get in touch for an initial consultation.
