If your company is struggling to repay its debts to creditors, you may be considering entering into a Company Voluntary Arrangement (CVA). A CVA can be a valuable lifeline as it allows you to restructure your debts and pay back liabilities over an agreed period of time, all without losing the day-to-day running of the business to an insolvency practitioner. However, while this type of agreement seemingly provides many benefits and welcome respite to struggling businesses, there are potential downsides and challenges associated with this approach. Understanding these drawbacks is key to making a decision that bolsters the chance of recovery for your business.
Impact On Credit Rating
While a Company Voluntary Arrangement provides a valuable path towards debt restructuring, the long-term implications of entering into this kind of agreement should not be disregarded. One of the major long-term downsides of a CVA is that it will negatively impact the credit rating of your company, potentially making it harder to secure credit and/or favourable payment terms in the future. This could hamper growth and recovery even after the business has met its obligations as set out by the CVA.
Approval Is Necessary
For a CVA to be approved, company directors must draft a proposal to be submitted to creditors for their consideration. This can be a particularly challenging and uncertain part of the process which not only takes time but also requires strong reasoning and negotiation skills. 75% of creditors will need to agree to the CVA, otherwise it will be rejected and steps to petition for the winding up of the company may be taken.
Long-Term Commitment
A CVA is a long-term commitment rather than a short-term fix. Although a CVA does provide immediate relief from creditor pressure and a structured plan for debt repayment, it still demands a significant and long-term effort from the company to ensure obligations are met. Most CVAs typically range from 3 to 5 years and the impact this may have on agility and day-to-day operations should be carefully considered alongside the benefit of restructured payment terms.
Secured Creditors Are Not Included
Company Voluntary Arrangements apply to unsecured creditors as opposed to secured creditors. This means that any creditor holding collateral (such as the bank) can still pursue their claims outside of the CVA should the company fail to pay. Secured creditors are typically understanding when a CVA is in place and will not apply any pressure providing their debts are serviced, but it is still important not to rest on your laurels and neglect the interest of secured creditors.
Liquidation Is Still Possible
Ultimately, liquidation is still a possibility even when a CVA is in place. A CVA does not remove the problem but does make it more manageable. If your company does not stick to its side of the arrangement or secured creditors are unhappy with the actions of your company, legal action can still be taken. At this point, a winding-up petition can be enforced with assets sold to repay creditors. This potential outcome underscores the risk inherent in relying solely on a CVA to resolve financial difficulties.
Ultimately, a CVA is not a one-size-fits-all solution and the lingering possibility of liquidation should demand careful consideration. However, this is not to say that a Company Voluntary Arrangement will not be a suitable next step if your business is struggling to repay its creditors. If you are struggling with business debts and not sure what your next steps should be, make sure that you get in touch with the expert team of business recovery experts here at Ballard Business Recovery. We will talk you through all of the different options available based on your unique situation.
