The pros and cons of CVAs

We do not live in a perfect world.  There are good and bad points to every insolvency process, all require compromises to be made.

Pros

• They are a great tool for extending or reducing creditor debts that cant be repaid;
• They can form part of the process for restoring a business to viability: by holding the creditors back and holding the business together, management can focus on what’s needed to turn things around;
• While all formal insolvency process cause value to be lost, CVAs cause less to be lost than others;
• Unlike other insolvency processes, while a CVA is in place you stay in control of the business;
• CVAs are an incredibly flexible solution, they can contain anything you and your creditors agree.

Cons

• Most CVAs fail.  This is because the CVA does not of itself somehow turn an unviable business model into a good one or strengthen a weak management team. CVAs are not for people who are unwilling to make tough decisions because when the CVA fails, which it must, everything will be lost;
• CVAs are very wearing on you and on the business.  They mean opportunities missed, drawings minimised, continuing tight cash flows, some customers lost and reduced supplier credit lines;
• It’s not easy exiting a CVA early.  While in a CVA, you won’t be able to do all you’d like to develop the business, for example buy another business or expand it in a way that means taking on further debt without the agreement of your creditors;
• It’s a costly process to set up – the Nominee’s costs are high, especially when assessing the prospects of a CVA based on future profit contributions.  It’s not a process for small companies;
• There can be major issues funding ongoing trading in a CVA: neither suppliers nor banks can be forced to give extend more credit; margins can be squeezed as trade suppliers increase their prices to claw back some of their debt;
• There are major problems where the company operates or recently operated a ‘defined benefit’ pension scheme.  Any ‘Financial Support Direction’ (an order to make good any shortfall on the scheme) made after the start of the CVA is an ongoing liability of the company following the recent Nortel and Lehman judgment.  With an FSD at best an uncertain sum, at worst a huge amount, the existence of a defined benefit scheme can make a CVA option unworkable;
• Supervisors cannot disclaim onerous property such as leases, landlords have to be persuaded to accept a surrender, and this can be costly.