A company voluntary arrangement (CVA) is a formal agreement between a company and its creditors to repay its debt over an extended period of time. It’s an alternative to liquidation or administration and it’s used as a way for the company to restructure its debts and continue trading. However, it’s important to note that a CVA is not a guarantee of success and there are several reasons why a CVA may fail. And they do fail, more CVAs fail than succeed.
First, the company may not have a clear and realistic plan for how it will turn its business around and become profitable. Without a solid plan, it will be difficult for the company to meet the terms of the CVA. The fact that a company is in a CVA will not turn an unviable business into a viable one.
Second, the company may not have enough support from its creditors and other stakeholders, including all important suppliers and employees. A CVA requires the approval of 75% of the company’s creditors, and if they don’t support the plan, it will not be approved. But that is only half of the battle. After the Proposal has been been formally approved, that support might be withdrawn at any time, say, because of a lack of confidence in the directors or by one or more ransom suppliers/employees following their own agenda.
Third, the company may not have enough cash flow to meet the terms of the CVA. Even with a solid plan and support from creditors, the company may struggle to make the payments required by the CVA if it doesn’t have enough money coming in. Sometimes payments into the CVA turn out to be overly ambitious, insufficient allowance made for ‘sod’s law’.
Finally, external factors such as economic conditions can change, making it difficult for the company to meet the terms of the CVA even if it had a solid plan and support from its creditors. This can be due to a downturn in the market or unexpected changes in consumer spending. 3-5 years is a long time to look forward.
From my own personal experience, one of the main reasons I’ve seen CVAs fail is due to lack of cash flow. Even if the company had a solid plan for turning its business around and gaining the support of its creditors and stakeholders at the time of the production of the Proposal, it may not have enough money coming in later on to meet the terms of the CVA. The CVA will typically require the company to make regular payments to its creditors, and if the company doesn’t have enough cash flow to make these payments, it may default on the CVA and be at risk of liquidation.
This lack of cash flow can be caused by a variety of factors such as reduced sales, increased costs, or difficulty in collecting money from its customers. Reasons for reduced sales include a double dip in the economy, customers refusing to deal with a company in CVA, and customer failures. Directors often tell me that a CVA is like going into a fight with one arm tied behind their back – such as the restrictions imposed by the Proposal/what’s been agreed with the creditors.
In order for a CVA to be completed successfully, it is vital that the company has sufficient a level of cash flow to meet the terms of the CVA throughout what might be an extended period of up to 5 years, and a detailed plan on how to increase cash flow and maintain it throughout that period. This can include cost-cutting measures, improving efficiency, increasing sales, or finding new sources of financing – the latter becoming increasingly difficult without the directors putting their own personal assets on the line.
In today’s increasingly uncertain times, when visibility is at a premium, it’s a brave person entirely convinced it’s the right thing to do who puts their company into CVA rather than the alternatives which, although more brutal in the short-term, can be safer in the longer term.
If you come to me asking for a CVA, you can expect me to critically appraise your plans in a huge amount of detail, I do not put forward CVA Proposals that rely more on luck than judgement as my reputation is on the line as much as yours. That having been said, if you would like an initial exploratory meeting, give me a call.