Advantages and Disadvantages of a CVA

There a number of advantages and disadvantages to a Company Voluntary Arrangement (CVA). Their relevance will very much depend on the individual circumstances of your company.

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Company Voluntary Arrangement Advantages

1. Debt written off
Normally CVA payments will last between 3 and 5 years. At the end of this term any unsecured debts still outstanding are written off. This means that you know exactly when the CVA will end and when the company will be free of its unsecured debt.

2. Low implementation costs
When implementing a CVA there will normally be an initial fee payable for the preliminary work required to prepare the CVA proposal. This will typically be between £1000-£2000. Any additional fees payable while the CVA is running are deduced from the normal monthly payments that the company pays into the arrangement. As such additional funds do not have to be found to pay ongoing CVA fees.

3. HMRC Tax and VAT debts included
As long as the initial proposal is reasonable there is no reason why HMRC will not agree to a CVA. As such any outstanding corporation tax, PAYE or VAT debts can be included.

4. Legal protection from creditors
Once a CVA is in place the creditors involved must stop all legal actions they are currently taking against the company and are no longer allowed to start new actions. Even a petition for the winding up of a company can be stopped by the implementation of a CVA.

5. No investigation of director’s conduct
If a CVA is used the company is not liquidated. As such no liquidator is appointed and no investigation of the conduct of the directors is carried out. As long as the CVA is completed there is therefore no risk of directors being accused of wrongful trading.

6. Directors overdrawn current account not called in
If the directors of the company have overdrawn current accounts these can be repaid to the company sensibly over a period of time (often by offsetting the payment of future wages against the account).

Company Voluntary Arrangement Disadvantages

It is important to understand that as well as benefits, starting a Company Voluntary Arrangement (CVA) can also have some disadvantages. Before making a decision to implement a CVA you need to understand these in the context of your company.

1. Company credit rating negatively affected
If a CVA is implemented the company’s credit rating will be negatively affected. This will make it harder for the company to get credit with suppliers and will make it very difficult to borrow extra funds while the CVA is in place. As such suppliers will often have to be paid on a cash basis.

2. Potential difficulties with starting new contracts
If a contract with a customer comes up for renewal or the company is bidding for new work, the potential client may wish to carry out a credit check against the business. The result of this will be poor and so may have a negative effect on the company being able to secure such new work depending on the client in question.

3. All profits paid to creditors
Any profit that the company makes while in a CVA will normally have to be paid to its creditors. If the business improves and the company becomes more profitable it is likely that the payments into the CVA will have to be increased. As such while the CVA is in place it is difficult for the company to invest in growth for the future.

4. Relatively inflexible
Once a CVA has been started, the company is bound to strict payment terms. Significant changes in payments can only be made with the agreement of the company’s creditors. If the company’s circumstances change for the worse and it is no longer able to make the agreed payments, the CVA may fail and the company may be wound up.

More Company Voluntary Arrangement Information

Only a brief overview of the Company Voluntary Arrangement advantages and disadvantages are given here. For more information about the CVA solution see one of our dedicated websites:

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