A Company Voluntary Arrangement allows a limited company to settle its debts with creditors over a fixed period of time, normally 3-5 years. Once the arrangement is completed, the creditors agree to write off any outstanding debt leaving the company to continue to trade debt free. were introduced into the law in 1986
At first glance, a Company Voluntary Arrangement is good news for both the company and its creditors. It allows a company which might otherwise have failed and been wound up to continue to trade. In theory, this provides the business the best chance to repay as large a portion of its historic debt as possible. Also, the business continues to provide future custom for its suppliers and remains a supplier to its customers.
Despite these potential benefits, many insolvency professionals believe there is significant chance of early failure of the arrangement and therefore view Company Voluntary Arrangements with scepticism. There are no formal statistics which prove or disprove whether this view of Company Voluntary Arrangements is correct. However, in my view, they are not a magic wand for turning round a failing business on their own.
If a Company Voluntary Arrangement successfully reduces historic debts to manageable levels, why might it fail to turn the fortunes of a company around?
One of the main reasons for this is that generally, once a Company Voluntary Arrangement is agreed, there is no change in the management team. Despite having relief from its debt, the company may be in need of a new approach and direction which the old team have been unable to identify. If no new blood is introduced, where are these ideas going to come from? In addition, the business may require a cost cutting exercise including a review of employees which is often a difficult task for old management who may have long standing relationships with their staff.
As well as new ideas and direction, a business entering into a Company Voluntary Arrangement is also likely to require additional investment to enable the new plans to be carried out. Very often the current management team and shareholders may have exhausted all of their ideas for additional finance. Therefore, they are unable to implement new ideas and methodologies even if they know what the business requires.
The bottom line for Company Voluntary Arrangements is that they are really only half a solution to ensure the successful turnaround of a business. It is true that they are an excellent way of gaining control of a company's legacy debts and wrapping them up in an affordable repayment plan. However, to ensure the future success of the business, new ideas and energy need to be introduced into the management team. This may mean changes to the team or an injection of ideas from an outside consultant. Hand in hand with this, new financial resources are likely to be required to ensure that the required changes can be implemented.
In my view, if new ideas and money are not realistically available, then the Company Voluntary Arrangement is likely to fail in its quest for company business turnaround because the reasons for the past failings of the business will not be addressed. As such, adequate plans for both of these areas need to be agreed before the decision is taken to use this as a solution. As the old saying goes: "If you do what you have always done, you will get what you have always got".
Author Resource:
Derek Cooper is Managing Director of Cooper Matthews Limited (http://coopermatthews.com).
Cooper Matthews specialise in Business Debt Rescue Advice helping you turnaround your business financial troubles. They have significant experience in working with small to medium sized businesses.
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