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Business Rescue During Covid-19: Is a CVA a Viable Option?

Empty wallet in the hands of a man on a light solid background, top view. Bankruptcy and insolvency in the economy and finance.

Business rescue options may be on many company directors’ minds during these unprecedented times.

It is undeniable that the business landscape has been heavily impacted by the 2020 coronavirus pandemic.

We’ve recognised a steeply increasing trend: the difficult reality that, due to coronavirus, previously healthy businesses are now facing the threat of insolvency.

Is my company insolvent?

If you are concerned about the current or future viability of your business, there are several key indicator tests to clarify whether your company could be defined as insolvent.

The most useful warning sign to consider in the current economic climate is whether your business is able to pay its debts as they fall due in the near future. This is known as the cash flow test.

Due to the decrease in trade as a result of Covid-19, companies that have otherwise demonstrated a strong, positive history of being able to meet their liabilities on time are now wondering how they will continue to do so.

You may recognise that this particularly applies to your company if:

  • You are tied into a long-term liability, such as a lease, which until recently made sense but now is unnecessary and a financial burden.
  • You have lost a significant proportion of your client base and are now faced with the prospect of attempting to reduce your outgoings proportionately.
  • You trade in one of the sectors (events, entertainment, travel, hospitality, construction) that have been left in limbo for an as yet undetermined period of time.
  • Your company has recently made financial investments to secure growth, but this is now no longer sustainable and the costs can’t be reversed.

What are the possible business rescue options?

If you believe your company is facing insolvency at present or in the near future, it’s crucial to act sooner rather than later.

There are a wide range of options available for directors to consider, including:

A CVL or ADM can be a favourable option in some cases. However, these options can have certain disadvantages when used for companies that have only recently become insolvent, in comparison to a CVA. We’ve outlined these disadvantages below.

Is an ADM the right option?

An ADM is a business rescue option that provides protection from creditor threats and legal action as the Insolvency Practitioner attempts to restructure the company.

However, ADMs can be expensive, and therefore may not be feasibly affordable to a company that is struggling to meet its liabilities.

In addition, an ADM needs to fulfil a statutory ‘purpose.

How about a CVL?

CVLs provide an affordable option in which the Insolvency Practitioner manages creditor claims and the orderly winding down of a company.

The specific downside here, in comparison to a CVA, is that entering liquidation could impact on the brand, affect relationships with stakeholders and break existing contracts.

In addition, any elements of the business that could be transferred to another entity by way of a sale agreement would be less likely to survive.

How could a CVA help me?

For businesses that have previously been able to stay up to date with liabilities but are affected suddenly by a significant event – like the coronavirus pandemic – the best business rescue option could be a CVA.

A CVA is a formally contracted repayment plan that typically lasts for up to five years, whilst allowing the business to continue trading.

This would enable a business to survive the negative impact of Covid-19, operating in a smaller, more streamlined state.

In this state, debts would be more easily managed and there would be opportunity to review any operational or management issues that contributed to the company’s insolvency.

Further advantages of pursuing a CVA include:

  • Control: You are able to remain in control as a director and therefore have a higher level of involvement with the business rescue.
  • Lower costs: The set-up and ongoing costs are often lower than those of an ADM. There is also no requirement for a cash lump sum for asset buy-back.
  • Higher returns: Creditors can expect to achieve a higher return in the long-term than they would from a CVL in the short-term. Whilst major creditors do have the ability to reject a CVA proposal, the higher estimated return should ultimately improve company/creditor relationships.
  • Reputational benefits: As the CVA is a private matter between the company and its creditors, there is no requirement for a company to inform customers that they are in one, although the CVA will be registered at Companies House.
  • Benefits for directors: Unlike in Administrations and CVLs, directors are not investigated or subject to the same level of scrutiny under the insolvency offences regime. Overdrawn directors’ loan accounts are not compelled to be repaid by an Office Holder (unless it is part of the proposal), whereas an Office Holder would seek to have this repaid in a CVL or ADM.
  • Protection from legal action:  Historic debts and obligations are compromised and bind all creditors that would have been entitled to vote in the CVA (most ordinary creditors – otherwise known as ‘unsecured’).

Pulling together during the coronavirus crisis

The coronavirus crisis has affected us all, and creditors may be sympathetic to companies that have suddenly become unable to meet their liabilities due to the impact of coronavirus on their trading.

As a result, they may be willing to accept a well-structured CVA debt repayment plan in order to return to a positive company/creditor relationship.

Governments has also put business rescue measures in place to aid the increasing number of insolvent businesses, and announced amendments to aspects of insolvency law to provide further support.

Most notably, wrongful trading provisions have been temporarily suspended. This gives directors more time to consider their options around insolvency whilst continuing to run their business, without the threat of personal liability.

Published: June 25, 2020

Source: HudsonWeir

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Hasib Howlader

Hasib Howlader is a licensed insolvency practitioner, chartered accountant and chartered tax adviser (a rare breed!). He has a wealth of experience in all financial matters, having cut his teeth at both UBS and PricewaterhouseCoopers before moving to direct his own Chartered Accountancy practice where he has overseen exceptional business development.

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