A CVA allows a company to settle unaffordable debt. A Pre Pack involves setting up a new company that trades debt free. Cost is a key consideration when deciding which is the most appropriate.
- CVA v Pre Pack Up Front Cost
- Are Monthly Payments Required?
- Do different costs apply to different companies?
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CVA v Pre Pack Up Front Cost
One of the advantages of a CVA (Company Voluntary Arrangement) is the relatively low implementation cost. Depending on the size of the company work will be required to prepare a Statement of Affairs. However this will normally be lower than the cost involved with setting up Pre Pack Liquidation.
There are various costs involved with a Pre Pack. Generally speaking the largest of these is the cost of liquidating the old company including buying its assets. These costs generally have to be funded by an investor although there are various ways of raising the cash.
CVA v Pre Pack Ongoing Payments
A CVA can be implemented with little or no up front investment. However once it is running the company remains responsible for making debt repayments for up to five years. The payments must be met. If not the Agreement will fail. This puts significant pressure on the business.
Ongoing CVA payments are continually reviewed and may increase if the company becomes more profitable.
On the other hand a new company set up as part of a Pre Pack solution is not saddled with debt. After the assets of the old business have been paid for there are no further payments to make. The company can then trade without any repayment pressure.
A Pre Pack company may pay for any assets it requires with staged payments. If so it will have the burden of ongoing payments for a period of time.
Costs vary depending on the circumstances
Ultimately it is not possible to say that a CVA is more or less expensive than a Pre Pack. The right solution for a company will depend on the nature of the business. The funding available to the directors will also be a significant factor.
If up front cash is limited a CVA may well be a more suitable option. The majority of the solution is paid for out of the ongoing payments made by the company itself. However these payments will weigh down the company for 5 years. They may also increase if profitability increases.
On the other hand if funds are available it may be better to use the Pre Pack solution. The up front outlay may well be recovered relatively quickly as there are then no ongoing debt payments required.