Case Studies for Company Voluntary Arrangement (CVA)

The CVA process allows the debtor company and its directors to remain in control despite extreme financial pressure on the business. It is quick, flexible and cost effective. However it is no panacea. It is an excellent way to restructure the balance sheet but more importantly allows the control over creditors, management problems and the breathing space to deal with distressed companies.

The following case studies give a fuller idea of how a CVA can be used to save a business.

Web Design and Software Development Company

Software Limited had been trading for around seven years. The company is a small business with two directors - and husband and wife team - and five employees. It specialises in two key areas: building and hosting web sites for multiple different businesses and developing bespoke software solutions.

Up until 2005, the business was running smoothly with a good spread of long standing clients. There was a modest overdraft facility of £4,500 with the bank and a £20,000 bank loan which had been taken to support expansion and the taking on of 2 new staff. Then in 2006, one of the directors was taken to hospital with a suspected heart attack. Luckily the director was able to make a recovery. However, this took six months. During this time, the co-director was not able to focus on the business and as a result, some of the ongoing sales campaigns were not successful, current clients were let down and cash flow was effected. In turn this meant that the business started to struggle to be able to keep up with its monthly bills. When quarterly PAYE and NI became due, the overdraft facility of the business was used to the maximum and the Directors increased their own personal borrowing to support the businesses.

After recovering, the one director was only really able to work part time in the business and some of the clients had cancelled their accounts and gone elsewhere. Although with renewed focus, the directors were able to stop the downward trend of the business, it continued to struggle with reduced cash flow and the burden of the debts that it had built up during the period. This situation seemed to be taking more and more time each month to manage and was preventing growth.

The directors of the business decided to undertake a CVA. They were initially looking at winding up the business however with some guidance from an Insolvency Practitioner, they realized that if they could get the company's debt situation under control, this would free up their time to build up again what was fundamentally still a good business. The CVA was therefore the perfect solution. It allowed the company to bind all of its debts into an agreement with creditors leaving an affordable monthly payment and ultimately writing off approximately 45% of the total debt. The company traded through this situation and is now fully recovered and has taken on a new member of staff.

Machine Tool Manufacturer

A management buy out (MBO) had been undertaken of a long established (100 years old) engineering company in receivership. As is often the case, the MBO was undercapitalised from the outset but the business was profitable, making £170,000 on £3.9m of sales in its first year.

The company had won a large contract early in its life which was planned to be spread over 2 years. Unfortunately, a change of mind by the contractor led to this work being compacted into 9 months. The expected margins were not made and the whole management team focused on ensuring delivery time scales were met. This led to a sharp fall in enquiries as sales development and marketing had been shelved.

A subsequent sharp drop in sales led to a cash flow crisis. Although a quality management team was in place some changes were necessary. The factory director left and the remaining directors invested new capital into the business. However, the business continued to face crippling debts which could not be serviced.

A CVA was proposed to the company's creditors which successfully managed and reduced the repayment of a £600,000 debt burden. This allowed the management team to concentrate on growing the sales of the business through the implementation of a new marketing plan. The sales book (which continues to grow as confidence grows and marketing approaches led to new sectors) is now at a level 16 times higher than at the time the CVA was introduced.