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Keep your business from crashing with a CVA

It hasn't been a great few weeks for Formula 1.

Less than a week after the wheels came off at Caterham, Marussia F1 declared that it too was falling into administration. Both teams will miss the US and Brazilian Grand Prix while the administrators attempt to find buyers for the besieged racing teams.

The news serves as a reminder that it is not just SMEs that face the threat of liquidation. Bad management or poor market conditions can result in any business skidding to a halt.

It used to be the case that businesses had no choice but to wind-up when faced with bankruptcy. Thankfully, this is no longer the case and businesses have a number of different options, each carrying different implications.

What is a Company Voluntary Arrangement?

One of your options is to apply for a Company Voluntary Arrangement (CVA). A CVA is a legal agreement between your company and its creditors. Threatened with a winding-up petition, your business can promise to repay your creditors either from future profits or from proceeds gained from selling company assets over an agreed time period.

You can only apply for a CVA through an insolvency practitioner. They will draw up an agreement which will be passed to the creditors. To be successful in winning an agreement, creditors who are owed a minimum of 75% of the debt must approve the agreement.

Benefits of CVAs

CVAs can provide a valuable opportunity to resurrect your business by recovering sales, rebuilding profits and settling outstanding payments. With a CVA, you can:

  • Continue trading
    The business will be able to keep trading and use its existing assets.
  • Retain control over the business
    Directors and shareholders retain full control, instead of the business being handed to an administrator or insolvency practitioner.
  • Improve cashflow
    Your business's cashflow will improve after the debt has been restructured in agreement with your creditors.
  • Keep the agreement private
    Business owners are not obliged to announce the situation to the public. This can help protect your reputation and credibility.

Disadvantages of CVAs

Although CVAs can seem infinitely more attractive than the alternatives, there are a number of potential drawbacks to be aware of. These include:

  • Leverage of large creditors
    Creditors who are owed 25% or more of the debt are able to dictate the terms of the agreement.
  • Your credit rating will fall to 0
    The business loses its credit rating when a CVA is agreed. This will make future borrowing and establishing relations with suppliers more difficult.
  • Secured creditors are not bound by the agreement
    Entering into a CVA does not protect the business from secured creditors. The business remains under threat of a winding-up petition if a default occurs or if the creditors become unhappy with repayments.
  • Time intensive
    CVAs generally run for between 3 and 5 years, depending on the amount owed and the schedule of repayment.

Talk to us

Our team of experienced business advisers can provide your business with the best possible chance of survival.

Contact us on 020 8515 2929 or send us an email at info@sterlingca.com to start getting your business out of difficulty.