The Main Benefits of a Company Voluntary Arrangement (CVA)

CVA
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If your business is in trouble and you are looking for ways to get investment capital, a voluntary commitment from the company could be a more affordable rescue solution than pre-purchase management. A voluntary company agreement costs less than the pre-pack administrator which is one of the company voluntary arrangement disadvantages.

If your business is in trouble and you are looking for ways to obtain investment capital, a voluntary commitment from the company could be a cheaper rescue solution than an upfront administration. If a public company has cash flow problems, two of the salvage options that are often taken into consideration is a voluntary business agreement (CVA) and a pre-pack administration.

The company’s voluntary agreement allows a company to reach an agreement with all its creditors to pay its debts over a set period of time (usually five years). During this period, the company will make a single, affordable payment each month in its CVA. At the end of the agreement, creditors agree to write off all unpaid debts and the company remains debt-free.

A pre-pack administration is a process of starting a brand-new business, which then buys the assets from the old business. The old company is then liquidated and the new company is traded in place without the burden of debt or debt repayments.

At first glance, compared to a CVA, the process seems to be the better option. After all, the new business is not burdened with historical debt and can trade freely. This is different from a CVA, where the company remains responsible for repaying debt for up to five years.

The significant disadvantage of pre-pack management which is inclusive of the company voluntary arrangement disadvantages, however, is the up-front costs. This is the investment cash needed to buy the useful assets of the old business at market value. An independent valuation of the assets (including any goodwill and work in progress) is performed. This amount is then needed to buy the business, and an investor must be found who is willing to make that money available.

Of course, a pre-pack process can be seen as a good use of mutual funds as they are directly geared towards investing in the growth of the new business. The main problem, however, is that such funds must be available at all. For a voluntary business agreement, the monthly payments are funded by the day-to-day operations and little or no investment capital is needed. As a result, there are no or minimal costs for the directors or external investors. When investment funds are available, this means that a CVA could be fully leveraged for business development and not swallowed up to pay debts or buy business assets.

The investment capital required to implement a pre-pack management solution is often a barrier to using this option. Therefore, a CVA is often a tastier option when cash is not available. But even if funds are available, it may be better to implement a CVA and use the funds available for ongoing business development.