A company voluntary arrangement (also known as a CVA) is an agreement between and a company and its creditors, to restructure and rescue the company when it is on the verge of going out of a business. This is a formal arrangement and the company version of an individual voluntary arrangement.
A company voluntary arrangement typically comes when the company and its creditors believe the business is still salvageable and is worth keeping up, rather than closing shop completely and all parties losing their money.
Typical examples to continue are if the company has a good brand name which is valuable and worth upholding. Or perhaps the company has a lot of stock which it can still potentially sell off. It might be that the company’s demise is down to market conditions and maybe things will improve.
Case Study: A good example is Jamie’s Italian, owned by Jamie Oliver, which is facing hard times, but rather than shut down 12 sites, the company has entered into a CVA so that it can recover the company and make it profitable again. Source: The Caterer.
Characteristics of a CVA:
- Typically 3 to 5 years
- Creditors accept that they do not make any profits during this time
- New cash or investment may be required
- At least 75% of creditors have to agree to it
- The arrangement must be monitored by a licensed insolvency practitioner
How Does The Company Get Rescued Through a CVA?
Profits on hold: With paying shareholders put on hold, the company, restaurant or organisation can focus on putting the money back into the business and keeping it money positive. It takes the financial pressure off a bit and also acknowledges that the shareholders do not require profits (so they will not be on your back).
New investment: A CVA can mean new investment, which can be used to revamp a business with a fresh look, new staff, equipment, stock and more. Perhaps new marketing, advertising or PR is required to help get the company name out there or change their current image for the better.
Lease restructuring: This involves taking the current lease contracts and changing them to suit the company with better terms. Usually provided by a professional commercial property agent, this could involve negotiating with landlords to get better terms, payment holidays, lower rates or anything that keeps the business in a better financial position and the landlord still happy. After all, its better than the landlord losing rent altogether because there will be nothing if the business goes bankrupt.
See also lease renewals as a way for companies to renew their leases and get better terms when they re-negotiate.
Rent reviews: For commercial properties that are paying rent, a failing business will benefit from a ‘rent review’ to help them negotiate better terms with their landlord on their monthly rent. Similar to lease restructuring, it means taking payment holidays, paying lower amounts and any other changes that will help keep the company solvent.
Downsizing: Perhaps the company took on premises that were too big or expensive (think about retailers, restaurants, bars or manufacturers). Maybe simple downsizing will help significantly save on costs and give the company a second life.
For more information, read about company voluntary arrangement here.