A company voluntary arrangement costs less than pre-pack admin

If your company is in trouble and you are looking for ways of preserving investment cash, a company voluntary arrangement could be a cheaper rescue solution than pre pack administration.

When a limited company is facing cash flow troubles, two of the rescue options which are often considered are a company voluntary arrangement (CVA) and a pre-pack administration.

The company voluntary arrangement allows a business to make an agreement with all of its creditors to settle its debts over a fixed period of time (normally five years). During this period, the company makes a single affordable payment into its CVA each month. At the end of the agreement, the creditors agree to write off any unpaid debt, and the company is left to continue to trade debt free.

Pre-pack administration or Phoenixing is the process of setting up a brand new company which then buys the assets from the old business. The old company is then liquidated and the new continues to trade in its place without the burden of any debts or debt repayments.

On first impressions, when compared to a CVA, the phoenix process seems much the better option. After all, the new business is not saddled with any historic debt and can start to trade freely. This is unlike a CVA where the company remains responsible for making debt repayments for up to five years.

However, the considerable downside of pre pack administration is the upfront cost. This is the investment cash required to buy the useful assets of the old business at market value. An independent valuation of the assets (including any goodwill and work in progress) will be undertaken. This amount is then required to buy the business and an investor will have to be found who is willing to provide this cash.

Of course, a pre pack process may be seen as a good use of investment funds as these will be targeted directly at investing in the growth of the new business. However, the major issue is that such funds have to be available in the first place.

For a Company Voluntary Arrangement the monthly payments are funded by the ongoing trading of the business and little or no investment capital is required. As such, there is little or no cost implication for the directors or outside investors.

If investment money is available, the existence of a CVA means that this could be used entirely for developing the business and not swallowed up paying for debt or buying business assets.

The investment cash required to implement a pre-pack administration solution will often be a barrier to the use of this business turnaround option. As such, a CVA will often be a more palatable option where cash is not available. However, even where funds are accessible, it may be better to implement a CVA and use the available funds for the ongoing development of the business.