A Case Study
There seems to be a belief, or perhaps it is just a widely circulated rumor, that a CVA just delays the inevitable liquidation or administration of a business. My opinion is that they can, and they do achieve their objective, just not all the time, but that does not mean they are not a useful recovery tool.
I was approached in March 2018 by the accountant for a business which was having cashflow issues. The main problem was that the funder who provided a book debt factoring facility would not flex to accommodate seasonal fluctuations in the business, which had resulted in periods when insufficient funds were made available to the company, which in turn lead to payments not being made on time. Liabilities had therefore arisen, and as often happens in business, the situation started to spiral, even though the underlying business was sound and viable. It needed a small injection of additional funding, a lender with some flexibility and willingness to understand the different levels of funding required at various times of the year and some careful accounts management with cashflow forecasting.
Working closely with the accountant and his team, we introduced new funders, and with their full support proposed a CVA. The terms of the proposal were that all creditors would be paid in full over a period of five years. HMRC were the controlling creditor and after a meaningful dialogue they supported the CVA.
By allowing the company to enter a CVA, over thirty members of staff retained their employment and the business met every one of its monthly payments up to and including March 2020. As I am sure we can all appreciate, with the Covid-19 lockdown the Government announced that all CVAs could be given a three month break in meeting their obligations and quite understandably the director requested the same. The three-month break afforded the director time to assess, rework cashflows and make cost cutting plans so that monthly contributions re-started on time.
Although in this particular instance it has not been necessary, it is possible to modify terms of a CVA, so if the director had concluded that for the next 12 months the business would only be able to afford 50% payments, creditors could be asked to consider modifying the terms by perhaps accepting less than 100p in the pound, or maybe extending the CVA to allow for a payment in full. It is this ability to provide a bespoke arrangement and to fine tune that I think is the best feature of a CVA. Clearly the encumbered directors must have an appetite to continue in the business, but you can see from this particular case that a viable business has been saved.
How Shaw Gibbs can help future businesses in financial distress or when dealing with customers or clients in financial distress?
Shaw Gibbs has two Insolvency Practitioners and a large, experienced team in position to help in all situations that involve or touch on insolvency or corporate recovery. We also have the back up of one of the largest accountancy and business advisory practices in the Thames Valley, with an office in London, to help advise business on a whole host of matters including; tax planning, accounts and audit, corporate finance, and financial planning. Furthermore, Shaw Gibbs' membership of the DFK international association provides further support in cross-border situations with different jurisdictions.