CVA v Administration How does a CVA compare to Administration?
Company Voluntary Arrangement (CVA) and Administration are two distinct approaches employed when a company faces financial turmoil.
Objective: A CVA primarily seeks to rescue a struggling company from insolvency, allowing it to maintain its operations while addressing financial difficulties. It establishes a structured plan for the company to repay its debts to creditors over an agreed-upon timeframe, often involving reduced payments and extended terms.
In contrast, administration has broader objectives, including the potential rescue of the company as an ongoing concern, achieving a more favorable outcome for creditors than liquidation, or realizing the company’s assets to satisfy secured creditors. It often entails stabilizing the company’s finances, restructuring its operations, or preparing it for a possible sale.
Business Continuity: Under a CVA, the company can continue its business activities, preserving its brand reputation, retaining its workforce, and maintaining customer relationships while undergoing financial restructuring.
In administration, business continuity depends on the pursued strategy. If a rescue plan is viable, the company may continue operations under the supervision of an administrator. However, if rescue efforts prove unsuccessful, the administrator may oversee the sale of assets or the winding down of operations.
Initiation: A CVA is initiated voluntarily by the company’s directors or shareholders. Its approval depends on securing at least 75% support from participating creditors by value through a voting process.
Administration can be triggered by various means, including the company’s directors, secured creditors, or a court order. It may also result from creditors filing winding-up petitions.
Appointment of a Practitioner: For a CVA, a licensed insolvency practitioner is typically engaged to facilitate the process. Their responsibilities include drafting the proposal, conducting creditor meetings, and overseeing implementation.
In administration, an insolvency practitioner, known as the administrator, is appointed to take control of the company’s affairs. The administrator assesses the company’s financial situation, formulates a plan, and executes necessary actions to achieve the administration’s objectives.
Debt Repayment: In a CVA, the company commits to repaying its outstanding debts to creditors over a specified term, often with reduced payments. Creditors receive a portion of their owed amounts, and any remaining debt is typically discharged upon successful completion of the CVA.
During administration, secured creditors typically receive preferential treatment, with negotiations for debt restructuring or asset sales to satisfy their claims. Unsecured creditors may receive partial payment based on available funds, but complete repayment is not guaranteed.
A CVA is primarily aimed at rescuing a company from insolvency while allowing it to continue trading, while administration is a more comprehensive process that can result in various outcomes, including rescue, better creditor returns, or asset realization. The choice between these options depends on the company’s specific financial situation and objectives.