A Company Voluntary Arrangement (CVA) can be beneficial for a company and creditors. The business continues to trade and is given the best chance to repay its debt. However used in the wrong situation it may fail.
- The reasons a CVA might fail
- How you can ensure a successful CVA
- When should a CVA not be used?
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The reasons a CVA could fail
If a Company Voluntary Arrangement is not implemented in the right circumstances it may fail. There are some key reasons for this. The first is there is no legal requirement to change the Directors. As such more often than not the management team remains the same.
The problem with a static management team is the company is starved of new ideas and direction. However these will be required to move the business forward. If no new blood is introduced it is difficult to see how this will happen. In addition significant operation change and cost cutting is often necessary. This can be difficult for old management who may have long standing relationships with their staff.
Creditors can demand a change in directors as part of their agreement to a Company Voluntary Arrangement. However this is relatively unusual.
Another major problem is that the company is likely to require investment. Cash will be needed to carry out the restructuring plans needed to make a CVA work. Very often the current management team and shareholders have exhausted all of their ideas for additional finance. As such they are unable to implement new strategies even if they know what the business requires.
How to ensure a successful CVA
A Company Voluntary Arrangement can be an excellent way of gaining control of a company debt problem. The repayments are wrapped into an affordable repayment plan. It also normally allows a significant amount of the debt owed to be written off. However on their own these benefits will not be enough to save the business.
For the Arrangement to be successful there must be an understanding of the potential problems. Before deciding to implement the solution the management team must agree that change is required. This may be to the Directors themselves. Alternatively they must be open to an injection of ideas from an outside consultant.
A CVA can work well if a new management team have recently been bought into a failing business. They will provide new ideas and drive which can be implemented under the protection of the Arrangement.
In addition the Directors must recognise that new financial resources are likely to be required. Securing the necessary funds is a critical part of implementing the Arrangement. This may be achieved from investment or other types of fundraising. If there is no confidence this can be achieved the suitability of the CVA solution must come into question.
When is a CVA the wrong company debt solution?
The chances of CVA failure are high if the management team does not change and new money is not available. But what if only one of these requirements is in place?
There may be a situation where the management team is willing to change. However there are no new funds to implement the strategies required. In these circumstances a Pre Pack solution is often a better option. This will enable a new company to trade without the burden of ongoing debt repayments.
If the management team are not willing to change it is highly unlikely that any company debt solution will be successful. Investors should be extremely wary of considering this type of business opportunity.