Why Do CVAs Get A Bad Press?

It is very simple, when a CVA succeeds very few people hear about it (it doesn’t have to be publicized unlike administration or liquidation). The company carries on trading and the debts are paid off over time. If it fails and then the company is put into administration or even liquidated then everyone is up in arms saying that CVAs don’t work. This is nonsense!

They do work and will, in most cases, pay more back to the creditors than other insolvency procedures. Mind you, for a CVA to work then the business must be viable and have a future so that creditors can be paid off over time. In most cases a CVA fails for the following reasons;

• The company has agreed to pay more to creditors than it can afford.
• Creditors have been poorly managed by the advisors and so have not been as supportive of the process as they should. A consensus with creditors should be the aim of the turnaround or insolvency advisors.
• The company is over optimistic on projected sales.
• The CVA advisors and management have not gone far enough to cut costs quickly
• The management have grown tired of being in business and so fall on their sword!
• Their bank has not been fully involved and although they are not bound by the CVA their advice and input is essential.
• A CVA was not the best tool for their situation. Perhaps an administration or in some cases a company liquidation would have been more appropriate.
• Advisors have little experience of CVAs but push ahead nonetheless. See below.

Example:  A director came to us wanting to change supervisors of the CVA as it wasn’t working.  When we looked into it we discovered that the company had debts of £1.5m on a turnover of £1m.  This immediately sounds unviable! especially as the CVA was to pay 100p in the £1 over 5 years.  To make matters worse, one of the main creditors was Amazon, as they ran an ecommerce site directly linked to Amazon.  So, given that Amazon controlled all the cash they didn’t comply with the terms of the CVA and started to take back what was owed to them.  So the IP who proposed the CVA had no idea what a “de facto” secured creditor was.  The IP should have left Amazon out of the CVA and suggested to the other creditors that 100p in the £1 was not possible.  We often get agreed CVAs with payments of 40p in the £1.  Funnily enough the IP who proposed this CVA hasn’t done very many!

CVAs are becoming ever more popular with big retailers with Poundstretcher being the most recent large company to use one.