Why don’t CVA’s work?
CVA’s often fail, but why? If they are put together properly they are an incredibly powerful turnaround tool, let us tell you why.
What is a CVA?
A CVA is in simple terms a legally binding contract between a company, its creditors and an Insolvency Practitioner like Kevin Lucas or Fiona Rae of Lucas Johnson.
It allows a business that is struggling financially, whether that be due to a bad debt, decline in turnover, losses on contracts or any number of other reasons, to carry on trading whilst paying off its creditors over a period of time, which is typically no more than 5 years. Why 5 years? Over time it has become the accepted length of time for a CVA to last if a company cannot pay its creditors in full.
How is a CVA put together?
With the help of a licensed insolvency practitioner like Kevin Lucas or Fiona Rae of Lucas Johnson, you put together a ‘contract’ called a proposal that provides your creditors with details of your assets and liabilities and a history about the business and why it is in its current predicament, and also put forward details of how you propose to repay the creditors – e.g. is it out of future trading profits, or will it be from selling certain assets, the recovery of a debt and timing is merely the issue or something else. There are many weird and wonderful ways of putting together an offer to creditors and too many reasons why a CVA can be beneficial to put in a short piece like this, but please contact us for more details.
Once the bones of a proposal have been put together, it is filed in court and sent to your creditors to consider. They have at least 2 weeks to consider the proposal before being asked to vote on its approval. A majority of 75% or more (in value) of voting creditors need to vote in favour of the proposal for it to be approved.
Why don’t CVA’s work?
CVA’s don’t work for a variety of reasons – they are often ill conceived and poorly put together by the Insolvency Practitioner approached, too few questions are asked and too little care is taken to ensure the company is doing something different to ensure its survival; sometimes key creditor support is not obtained going forward meaning the business is unable to maintain or maximise its sales; there is always the problem of nobody has a crystal ball and nobody can predict the future therefore events may overtake the expectations of the management in a negative way; failing that the problem in a lot of businesses is the management not being willing to implement changes in the way the company works as this can frequently involve an admittance that there are shortcomings within the management team.
A recent company failure – Brookmann Home Manchester 1877 Limited – highlighted that a CVA put in place 6 months before the company went into Administration demonstrated that there was a fundamental problem with the proposal or expectations at the time if the reason given by Insider North West is accurate – “Brookmann was in a virtually mothballed state prior to the CVA. As a result it did not meet the post-CVA trading performance forecasts, with administrators later appointed”. Part of Brookmann’s problem was a legacy debt that does not appear to have been adequately identified or considered in the due diligence when purchasing the business that led to the CVA being necessary.
Why choose Lucas Johnson when looking at your CVA
We not only claim to put together CVA’s in a way that is creative and innovative, we can prove we do so. We have put together Voluntary Arrangements for Companies, LLP’s and Partnerships from a 6 month one off settlement proposal with HMRC being the only creditor to a CVA in excess of 7 years and payment in full. We have put together CVA’s in the construction field, in the professional services sector, manufacturing, leisure and retail to name but a few.
We ensure we understand the business, what has happened to bring it to its current position, what needs to change, what is changing, play devil’s advocate with your idea and your proposal and see if it works. This way you can be assured of the best chance of success, you can ensure shortcomings have been spotted and dealt with and more importantly your company and its CVA is set up to be as successful as possible.
But of real benefit is our clear goal of making sure you get the best solution, which may be a CVA, but it might be something else. Once we understand your goals and desires, we tailor the solution to you. If it is a CVA it may be we help you understand how you can literally tear apart your current business and put it back together in the most beneficial way. For example a CVA can allow you to streamline your workforce, renegotiate leases and end unprofitable contracts with minimal impact, and these three factors alone can transform your company from being unprofitable to profitable overnight.
We have been advocates of the under utilised CVA process for years, but until more recent times they have not been popular, why not Contact us today on 0330 900 2000 to see how they could benefit your business and how we can make your CVA work for you.