Is a Company Voluntary Arrangement only half a solution to save a Failing Business?
On the face of it, a Company Voluntary Arrangement is beneficial for both the company and its creditors. It allows a company which might otherwise have failed and been put into liquidation to continue to trade. Despite these potential benefits, many insolvency professionals have long regarded Company Voluntary Arrangements with scepticism because they believe there is a likelihood of early failure.
Company Voluntary Arrangements were introduced into the law in 1986. A Company Voluntary Arrangement allows a limited company to settle its debts with creditors over a fixed period of time, normally 3-5 years. Once the arrangement is completed, the creditors agree to write off any outstanding debt leaving the company to continue to trade debt free
On the face of it, a Company Voluntary Arrangement is good news for both the company and its creditors. It allows a company which might otherwise have failed and been wound up to continue to trade. On paper at least, this provides the company the best chance to repay as much as possible of its historic debts. In addition, the business continues to provide for its customers and trade with its suppliers.
Despite these potential benefits, many insolvency professionals have long regarded Company Voluntary Arrangements with scepticism because they believe there is a likelihood of early failure. There are no available statistics which prove or disprove whether this view of Company Voluntary Arrangements is correct. However, in my view, they are not a magic wand for turning round a failing business on their own.
If a Company Voluntary Arrangement successfully reduces historic debts to manageable levels, why might it fail to turn the fortunes of a company around?
One of the main reasons for this is that generally, once a Company Voluntary Arrangement is agreed, the company management team remain the same. Despite having relief from its debt, the company may be in need of a new approach and direction which the old team have been unable to identify. WHere are new ideas going to come from if it is the same old team? In addition, the business may require a cost cutting exercise including a review of employees which is often a difficult task for old management who may have long standing relationships with their staff.
As well as new ideas and direction, a business entering into a Company Voluntary Arrangement is also likely to require additional investment to enable the new plans to be carried out. Very often the current management team and shareholders may have exhausted all of their ideas for additional finance. As such, they are unable to implement new ideas and methodologies even if they know what the business requires.
The bottom line for Company Voluntary Arrangements is that they do not provide a full solution to ensure the business has a sucessful turnaround. There is no doubt that they are an excellent way of gaining control of a company’s legacy debts and wrapping them up in an affordable repayment plan. However, to ensure the future success of the business, new ideas and energy need to be introduced into the management team. This may mean changes to the team or an injection of ideas from an outside consultant. Hand in hand with this, new financial resources are likely to be required to ensure required changes can be executed.
In my view, if new ideas and money are not realistically available, then the Company Voluntary Arrangement is likely to fail in its quest for company business rescue because the reasons for the past failings of the business will not be addressed. Therefore, adequate plans for both of these areas need to be agreed before the decision is taken to use this as a solution. After all, as the old saying goes: “If you do what you have always done, you will get what you have always got”.
Resources:
Derek Cooper is Managing Director of Cooper Matthews Limited (http://coopermatthews.com).
http://www.company-debt.co.uk/cva-company-voluntary-arrangement.html provides more details about Company Voluntary Arrangement
Cooper Matthews specialise in Business Debt Rescue Advice helping you turnaround your business financial troubles. They have significant experience in working with small to medium sized businesses.
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