CVA vs. Administration - Which is Right for Your Ailing Business?

In the tumultuous world of business, financial difficulties can strike at any time, leaving companies scrambling for solutions to stay afloat. Two common mechanisms for addressing such challenges are a Company Voluntary Arrangement (CVA) or administration. While both are designed to help financially distressed businesses, they serve different purposes and involve distinct processes. In this comprehensive guide, we'll explore the differences between CVAs and administration and help you determine which option may be right for your ailing business.

Company Voluntary Arrangements (CVAs)

Objective: CVAs are primarily aimed at rescuing financially distressed companies from insolvency while allowing them to continue trading. The key goal is to restructure the company's debts and provide a framework for debt repayment to creditors.

Business Continuity: CVAs prioritize business continuity, ensuring that the company can continue its operations, preserve its brand reputation, retain its workforce, and maintain relationships with customers.

Initiation: A CVA is initiated voluntarily by the company's directors or shareholders. Approval depends on receiving at least 75% support from participating creditors (by value) through a voting process.

Appointment of a Practitioner: Typically, a licensed insolvency practitioner is engaged to facilitate the CVA process. They are responsible for drafting the proposal, coordinating creditor meetings, and overseeing the arrangement's implementation.

Debt Repayment: In a CVA, the company commits to repaying its outstanding debts to creditors over a specified term, often with reduced monthly payments and extended terms. Creditors receive a portion of their owed amounts, and any remaining debt is typically discharged upon the successful completion of the CVA.

Administration

Objective: Administration is a broader process with multiple potential outcomes. It can aim to rescue the company as an ongoing entity, secure a more favourable result for creditors compared to liquidation, or realize the company's assets to satisfy secured creditors if rescue or better results are not feasible. It often involves stabilizing the company's financial situation, restructuring its operations, and preparing it for potential sale.

Business Continuity: During administration, business continuity depends on the pursued strategy. If a rescue plan is viable, the company may continue operations under the supervision of an administrator. However, if rescue efforts prove unsuccessful, the administrator may oversee the sale of assets or the winding down of operations.

Initiation: Administration can be triggered by various means, including the company's directors, secured creditors, or a court order. In some instances, it may be a response to a winding-up petition presented by creditors.

Appointment of a Practitioner: An insolvency practitioner, known as the administrator, is appointed to take charge of the company's affairs during administration. The administrator's role encompasses evaluating the company's financial position, devising a plan, and executing necessary actions to achieve the administration's objectives.

Debt Repayment: Throughout administration, secured creditors usually receive preferential treatment, and the administrator may negotiate with them to restructure their debt or sell assets to satisfy their claims. Unsecured creditors may receive some payment based on available funds, but there is no guarantee of full repayment.

Which is Right for Your Business?

The choice between a CVA and administration hinges on several factors:

Business Viability: If your business can be rescued and has the potential for long-term profitability, a CVA may be the better option. It allows you to restructure your debts and continue trading.

Immediate Financial Crisis: If your business is in immediate financial distress and faces threats of legal action or liquidation, administration may be necessary to stabilize the situation quickly.

Creditor Support: If you have supportive creditors willing to work with you on a repayment plan, a CVA may be more feasible. However, if creditors are pursuing legal action, administration may be the only viable route.

Asset Value: If your company's assets have substantial value and selling them could provide a better outcome for creditors, administration may be preferable.

Long-Term Strategy: Consider your long-term goals for the business. A CVA can allow for recovery and continued operation, while administration may result in asset sales or the winding down of the company.