Company Voluntary Arrangement
Comparison of the merits of a Company Voluntary Arrangement vs a Pre-pack
Once a business is in a turnaround situation, the management will be faced with a few stark choices. The most obvious ones are either to put the company into liquidation and just walk away, or if there is a means of raising funds, to repurchase the critical parts of the business from the liquidator and start again (commonly referred to as a Pre-pack).
The main features of a Pre-pack are that, unless the liquidated business had substantial assets, unsecured creditors are likely to get very little of their debt repaid, if anything. Furthermore the assets of the business that are worth saving are likely to be available at what is effectively a discounted price. Thus a new, debt-free business can be set up at a relatively low cost.
The down side is that there are likely to be some very unhappy creditors. We should also point out that the authorities are, quite understandably, becoming increasingly concerned about the use of Pre-packs, particularly where they are perceived as being primarily a means of "off loading" creditors
There may however be another solution. One that may be slightly less well known to some business managers. This is to apply for a Company Voluntary Arrangement (CVA).
A Company Voluntary Arrangemant is a legally binding arrangement between a company and its creditors to repay them over a period of time.
Key Benefits of a Company Voluntary Arrangement:
- It enables the company to continue in business with a view to improving the position of the creditors
- Stops court action and winding up procedures
- Eases cash flow pressures
- Directors are allowed to remain
- Greater flexibility allowed to ensure that the return to creditors is maximised
If a company has a viable future, but current cash flow problems have resulted in mounting creditor pressures and the threat of a winding up petition, a Company Voluntary Arrangement may be a good solution.
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