Updated: 6th July 2020
At a time when doors should have been flung wide open to customers and staff, most businesses have instead been battening down the hatches and furloughing employees in an attempt to firefight the effects of this relentless virus and safeguard their business going forward.
For the majority, trade has been virtually non-existent for more than three months during which time overheads haven’t changed and liabilities are still accruing. Furthermore, there is little guarantee of trade resuming at a similar rate post-lockdown as consumer confidence takes time to restore.
This brings into focus a forecasted surge in company insolvencies but for those previously profitable businesses that take early action, business rescue via a fast-track Company Voluntary Arrangement (CVA) is real possibility.
A CVA is a formal insolvency process enabling a compromise to be entered into between a company (debtor) and its creditors, based on a vote passed by a majority of creditors greater than 75% of those voting on the proposal. But for small-to-medium-sized businesses – particularly those agile owner-managed businesses – a CVA can be accelerated to help turnaround the fortunes of a viable business currently hampered by sudden trading difficulties.
“A fast-track CVA – in a similar vein to a light-touch administration – is an imaginative company restructuring procedure at a time that calls for innovative support measures for UK businesses,” says Bob Maxwell, Partner at Begbies Traynor.
“When used correctly and efficiently, a CVA is an excellent tool that can steer previously profitable businesses out of the red and back into the black whilst satisfying creditors. COVID-19 has put thousands of businesses at risk of collapse through no fault of their own and a fast-track CVA is an ideal solution if the business itself is still viable but needs the breathing space to recover.
“Propping up a business with emergency loan funding, deferred VAT, Time to Pay from HMRC, and rent holidays from landlords might be prudent measures in these unprecedented times but they all have one major caveat; they will all need paying at some time in the future. That’s why businesses need to consider the bigger picture sooner rather than later.”
CVAs have attracted criticism in recent years after the likes of Mothercare, BHS, and Woolworths all entered into CVAs that eventually failed. But as Bob alludes to, a CVA can only work if it’s raison d'être is to rescue a business rather than simply delay an inevitable liquidation.
“The viability of the business is key,” Bob says.
“Some CVAs in the past have not been fit for purpose but if a company has a genuine chance of succeeding rather than simply looking to stave off closure for a while longer, it can be a win-win situation for all parties involved. The company itself can continue trading, employing and working with its supply chain, whilst creditors will recoup more through a CVA than they would if the debtor went into liquidation.”
If your company is currently experiencing trading difficulties and creditor pressure but has the potential to be profitable once again given the time and protection, please contact Bob today for a free, confidential, no-obligation consultation.
Bob Maxwell is a Partner at Begbies Traynor and has nearly 30 years’ restructuring and recovery experience.