Administration VS Company Voluntary Arrangement – What’s the difference?
The following article outlines the differences between Administration and a Company Voluntary Arrangement and how a company’s current financial situation is the best indicator of which of the processes would be best for it.
However, in all instances and throughout the article, we underpin our suggestions with the strong recommendation that a company director experiencing financial difficulties should consult an insolvency professional as soon as possible.
An initial meeting will always be free and with the depth of the insolvency professional’s experience, it may be possible to recover a business experiencing financial difficulties. If there is a delay in seeking advice, pressure could mount on the company, which will restrict the options available to it and make the need for a formal insolvency/closure of the business more likely.
Chamberlain & Co have been established for over 20 years and liquidations and administrations have been core services throughout. We work very closely with clients, making the process as stress-free as possible, regardless of how complex the problem is. We offer an in-house team of award-winning, dedicated professionals who specialise in insolvency, restructuring, rescue and business turnaround.
WHAT IS THE DIFFERENCE BETWEEN ADMINISTRATION VS COMPANY VOLUNTARY ARRANGEMENT?
Both Administration and a Company Voluntary Arrangement are company rescue procedures. A Company Voluntary Arrangement is similar to an Individual Voluntary Arrangement in that it is a contract between the company and its creditors.
WHAT IS COMPANY ADMINISTRATION?
A company administration is an insolvency process where an administrator is appointed and takes control of the company, whilst the powers of the directors cease. Predominantly it is used in one of three ways:
Pre-pack Administration
The objective of a pre-pack administration is to sell business assets to a purchaser, be it a third party buyer or existing management / stakeholders.
Marketing of the business and sale negotiations are undertaken prior to an Insolvency Practitioner’s appointment, with the sale taking place soon after, often within minutes or hours of the appointment being made. A pre-pack sale is often used to preserve asset value, save jobs and stop legal proceedings, where trading the company is not a viable option.
Trading Administration
This is where the Administrator the company for a period of time, usually whilst marketing the business for sale.
Whilst the company will be insolvent, it will have sufficient assets and income to meet its trading costs whilst a buyer can be sought. In many instances, this type of administration can maintain a company’s position in the market.
Shut-Down Administration
A shut-down administration is where the company ceases to trade immediately.
However, this means that any assets are protected and will trigger a moratorium, which is done so automatically when a company goes into administration. This will stop any legal threats to the business. We have previously written an article explaining the full process, which you can find here.
WHAT IS A COMPANY VOLUNTARY ARRANGEMENT?
A Company Voluntary Arrangement (CVA) is a contractual agreement between a company and its creditors whereby the company offers repayment of what it can afford to fulfil the debt. These arrangements can either be agreed by payments from profits, in a lump sum payment – eg selling a property and relocating to a leased property to release funds, or any other suitable proposal based on the company’s unique circumstances.
Whilst an Insolvency Practitioner must undertake due diligence before recommending a CVA be approved, there is no prescribed format for a CVA – the contract terms just need to be acceptable to the creditors and reflect its best offer.
CVA’s can also be an exit route from administration in that an administrator can propose a CVA if they feel this would be more suitable. We have previously written a full article which explains the process in more detail, which you can find here
DOES A CVA MEAN ADMINISTRATION?
No, the two processes are distinctly different. In administration, the running of the company lies with the Administrator or Insolvency Practitioner whereas, in a CVA, the incumbent directors will retain control of the company, providing they abide fully by the terms of the CVA agreement.
PRE-PACK ADMINISTRATION VS COMPULSORY VOLUNTARY ARRANGEMENT
In a pre-pack administration, the business is widely marketed for sale, and the bidders for the business can include the board of the company in question, and/or its management.
In real terms this means that the directors would be able to buy the company assets but leave the company debts behind, providing they had put forward the best offer, that the offer was recommended by the proposed Administrator’s agents and had the approval of an Evaluator, which is required for connected party sales.
WHAT HAPPENS WHEN A COMPANY GOES INTO VOLUNTARY ADMINISTRATION?
If creditors agree to the terms of the CVA, the day to day operations of the business will continue. The company will need to make agreed payments to the CVA fund to fulfil the terms of the agreement. An Insolvency Practitioner will act as Supervisor, ensuring that the company meets its obligations, and keep creditors updated as to the CVA’s progress.
DO COMPANIES SURVIVE CVA?
Yes. If a CVA is successfully completed then a company can continue under its own management and no longer be bound by the terms of the CVA contract.
However, in some instances a company can fail a CVA – for example if income drops significantly. If the CVA fails then it is likely the company will enter into Administration or Liquidation.
If anyone with a CVA is struggling to meet the terms of their contract, we would recommend that they speak to an Insolvency Practitioner as soon as possible. They can review the company’s options and may be able to re-negotiate the existing terms of the contract to enable it to continue.
DOES A CVA AFFECT ALL CREDITORS?
Broadly yes, but fixed charge creditors, such as banks, are not included in a CVA and they can demand repayment of the debt at any point as set out in their security documents, assuming a default arises.
Banks are often open to negotiation providing they are receiving some form of repayment and can see a plan is being formulated with the input of appropriate professionals to maximise the company’s position. For any company in this position, we strongly suggest consulting an insolvency professional to help them navigate this process.
Indeed, our policy at Chamberlains is that we always recommend that any individual facing financial difficulties seeks out an Insolvency Practitioner to help them decide on the right path for their circumstances.
Any insolvency professional will be a licensed expert and regulated to dispense advice and initial consultations are always free.
Chamberlain & co offer a discreet, free initial consultation and can be held via telephone, face to face meeting, or through a digital medium such as Microsoft Teams. All matters are discussed confidentially, and the team undertakes the utmost discrete enquiries when working with you to produce a strategy to resolve your issues.
As with all insolvency practitioners, Chamberlain & Co are committed to delivering the best advice in all scenarios, and the team’s work has been recognised regularly at the Yorkshire Accountancy Awards and Turnaround, Rescue and Insolvency Awards.
You can contact us by calling 0113 242 0808; by emailing us at advice@chamberlain-co.co.uk or by completing our online contact form here.