When your business faces financial difficulties, not all roads lead to liquidation. Two robust rescue procedures—Company Voluntary Arrangements (CVAs) and Administration—can potentially save your business, rather than simply closing the doors.
But which one is right for your situation? Understanding the differences between CVAs and Administration is crucial for making the best decision for your business, your employees, and your creditors.
What Is a Company Voluntary Arrangement (CVA)?
A CVA is a legally binding agreement between a company and its creditors to repay debts over time. Think of it as a payment plan for your business that provides legal protection while you trade your way back to profitability.
How a CVA Works
Proposal: Your insolvency practitioner (acting as the Nominee) prepares a detailed proposal outlining how creditors will be paid over the CVA period, typically 3-5 years.
Creditor Vote: Creditors vote on whether to accept the proposal. It requires approval from 75% of creditors by value (though specific objections can modify this).
Implementation: Once approved, the CVA binds all unsecured creditors, even those who voted against it. The insolvency practitioner becomes the Supervisor, monitoring compliance and distributing payments.
Trading Continues: The company continues trading under director control, making regular payments to the Supervisor who distributes funds to creditors according to the agreed terms.
Completion: After fulfilling the CVA terms (usually paying an agreed percentage of debts), remaining unsecured debts are written off and the company emerges debt-free.
Key Features of CVAs
Directors Remain in Control: Unlike administration, directors continue managing the business day-to-day.
Flexible Terms: CVAs can be tailored to business circumstances, including seasonal payment variations or performance-based contingencies.
Creditor Moratorium: Once proposed, creditors cannot take legal action without court permission, providing breathing space.
Cost-Effective: Generally less expensive than administration due to reduced professional fees.
Confidential: CVAs do not require court involvement (except in disputes), making them more discreet than administration.
What Is Administration?
Administration is a formal insolvency procedure where an insolvency practitioner (the Administrator) takes control of the company to achieve one of three statutory objectives:
- Rescuing the company as a going concern
- Achieving a better result for creditors than immediate liquidation
- Realising property to make distributions to secured or preferential creditors
How Administration Works
Appointment: The Administrator is appointed via court order or out-of-court appointment by directors or a qualifying floating charge holder.
Control Transfer: Directors lose control; the Administrator manages the business and makes all decisions.
Moratorium: An automatic moratorium prevents creditor action, including winding-up petitions, legal proceedings, and enforcement of security (with some exceptions).
Strategy: The Administrator pursues one of the statutory objectives, which might include:
- Trading the business while seeking a buyer
- Restructuring the business for sale or return to directors
- Selling assets
- Preparing for CVA or other exit strategy
Exit: Administration typically ends through:
- CVA (combining both procedures)
- Sale of business and assets
- Return to director control (if rescued)
- Liquidation (if rescue fails)
Key Features of Administration
Strong Legal Protection: The moratorium is more comprehensive than a CVA, stopping virtually all creditor action.
Administrator Control: The Administrator has extensive powers and does not need director or creditor approval for most decisions.
Public Process: Appointment must be advertised, and the company must state “in administration” on all documents.
Time-Limited: Usually lasts up to 12 months (extendable in certain circumstances).
Flexible Outcomes: Can lead to various exits, including CVA, sale, or liquidation.
CVA vs Administration: Key Differences
Control
CVA: Directors retain control and continue managing the business. The Supervisor monitors day-to-day operations but only intervenes in cases of non-compliance.
Administration: The Administrator takes complete control. Directors must cooperate but have no management authority.
Creditor Protection
CVA: Provides protection once proposed and approved. However, secured creditors aren’t bound without consent, and landlords retain some rights.
Administration: Offers immediate and comprehensive protection upon appointment, including secured creditors (with some exceptions for fixed charges).
Cost
CVA: Generally less expensive. Typical costs range from £15,000 to £30,000, depending on complexity, plus ongoing Supervisor fees (usually a percentage of payments).
Administration: More expensive due to the Administrator’s extensive responsibilities. Initial costs typically range from £30,000 to £50,000, with ongoing fees based on time costs and complexity.
Speed of Implementation
CVA: Can be proposed and approved within 3-4 weeks if creditors are supportive.
Administration: Can be implemented very quickly (same-day out-of-court appointments are possible), but planning and achieving the objectives take longer.
Publicity
CVA: Relatively private. Only creditors and Companies House need to be informed.
Administration: Public. Must be advertised in the London Gazette and local papers, and the company must declare it’s in administration on all communications.
Impact on Contracts
CVA: Does not automatically affect contracts. Suppliers and customers may not notice any change.
Administration: May trigger termination clauses in contracts, though key contracts can often be preserved through negotiation.
Suitability
CVA: Best when the business is viable but over-leveraged, and when maintaining customer and supplier confidence is crucial.
Administration: Better when immediate and strong protection is needed, or when significant restructuring is required.
When to Choose a CVA
A CVA may be the right choice when:
The Business Is Fundamentally Sound
The core business is profitable or can be made profitable with debt relief. The problem is too much debt, not a failed business model.
Director Control Is Important
You want to continue managing the business and believe you’re best placed to deliver the turnaround.
Relationships Matter
Maintaining existing relationships with customers, suppliers, and employees is critical, as publicity about administration could damage these relationships.
Costs Must Be Minimised
- The business cannot afford the higher costs of administration, or the scale of debt does not justify such a formal intervention.
When to Choose Administration
Administration may be the better option when:
- Creditor Pressure Is Intense
- You are facing legal threats such as winding-up petitions, or secured creditors are about to enforce security. Administration offers immediate, comprehensive protection.
- Restructuring or Sale Is Needed
- The business requires significant restructuring, or there is an opportunity to sell the business or its assets to preserve value and jobs.
- Director Control Is Not Critical
- You are comfortable handing control to an insolvency practitioner to protect the company and deliver the best possible outcome.
- You Need Breathing Space
- Administration provides time to explore restructuring, refinancing, or sale options without the risk of creditors.