I hear that CVAs don’t work??
So why do they sometimes get a bad press?
The reasons are simple. If a company in a CVA continues to perform poorly despite the creditor pressure being lifted, then the company may not succeed. However this does not mean the whole process is flawed. It simply means that things can and do go wrong for businesses in any industry or economic climate. Hard economic truths aside, in our view the majority of cases CVAs fail because they have not been carefully constructed and implemented.
The most common mistakes the company and its advisors make in drawing up and implementing a CVA are the following;
- The company has agreed to pay more to creditors than it can afford.
- Creditors have been poorly managed by the advisors and so have not been as supportive of the process as they should. A consensus with creditors should be the aim of the turnaround or insolvency advisors.
- The company is over optimistic on projected sales.
- The CVA advisors and management have not gone far enough to cut costs quickly
- The management have grown tired of being in business and so fall on their sword!
- Their bank has not been fully involved and although they are not bound by the CVA their advice and input is essential.
- A CVA was not the best tool for their situation. Perhaps an administration or in some cases a liquidation would have been more appropriate.
Depends on what your definition of failure is. If a CVA works for 3 out of 5 years and 30p in the pound to creditors is this not amuch better return than an administration that closes the company down at the start and only pays5p in the pound with no further dividend for creditors? Also the directors can’t really hand on heart say they have done all they can to save the business.
Finally the survival statistics for new companies make for pretty grim reading. Over two thirds of new companies will have failed after three years.
