Are CVAs still working for UK businesses?

A Creditors Voluntary Arrangement (CVA) is a deal between a company and its creditors; the typical CVA is based on preserving the company, protecting cash flow, and then paying back debts over an agreed period of time. Directors remain in control of the company, personal guarantees are less likely to be called in, and it gives a business a fighting chance to survive a cash flow crisis.

In essence the CVA is a measure designed to help businesses on the brink and give them the fighting chance of saving themselves. By sustaining businesses with CVAs, creditors are in turn supporting the wider economy, as well as their own financial position. However, it is becoming increasingly common for CVA proposals to be rejected by HM Revenue and Customs (HMRC).

So just what are the issues surrounding CVAs?

Phil Duffy, Partner, MCR commented: “For a business in difficulty a CVA can be used to manage a cash flow crisis in order to keep trading while paying off its debts in a manageable way. By constructing a CVA proposal as part of a turnaround process, with lower levels of contributions during the early period of the agreement (increasing as the company becomes healthier), this can prove successful - as recent events with Dundee football club have shown.

In the past HMRC has been a firm supporter of CVAs, but recently it has been rejecting a number of CVA proposals.  While there are no published statistics on the numbers of liquidations resulting from failed CVAs, history would suggest a large percentage have failed; it is believed that the failure rate of CVAs post approval is somewhere between 60 and 70 per cent,” continued Phil.

“The main problem with the CVA is that they are seen as a quick remedy to a short-term problem. The foundation of the CVA is based upon the theory that the problem creating the cash flow crisis has been solved and that the CVA is a tool to manage that crisis. Too many times that problem not been solved and therefore the CVA tool does work.

HMRC have started to recognise this and hence are not agreeing to certain CVA’s.  A well constructed and properly used CVA will always get support from the HMRC.

Another problem arises when you encounter a double dip in the economy. Businesses that have started to recover over the course of the year are hit again, and once more find themselves in a position where they are unable to carry on with repayments.

Do CVAs work?

The statistics confirm that the majority do not. However, it must not be ignored that despite the figures, they should remain a key element to sustaining business through hard economic times. The key to a successful CVA is to only use it when the situation requires it and not just to defer payment.

With more and more company’s feeling the strain, more CVA’s maybe proposed and it will be hard to separate those proper CVA’s from those used as a sticking plaster,” concluded Phil.