When cash flow tightens and pressure mounts, many directors fear the worst. Yet insolvency does not always mean closure. For companies with strong fundamentals, a Company Voluntary Arrangement (CVA) can be the bridge back to stability. Used correctly, it allows businesses to restructure debts, maintain control, and buy time to recover. The challenge lies in knowing whether your business is truly suitable for such an arrangement.
A CVA is not a magic wand. It requires commitment, discipline, and a realistic plan that creditors believe in. Directors must be prepared to act decisively, often making difficult cost-cutting decisions to restore profitability. The CVA gives breathing space, but only viable businesses can make full use of it.
This article explores what makes a business suitable for a CVA, the tests of insolvency, and the critical factors that influence viability. It also highlights the responsibilities directors must face and how to approach creditors with credibility and confidence.
Understanding the Tests of Insolvency
The first step is knowing whether your business is insolvent in the eyes of the law. There are four recognised tests, any one of which may apply. These include being unable to pay debts as they fall due, having liabilities that exceed assets, failing to respond to a statutory demand, or carrying an outstanding court judgment. Passing any of these tests means insolvency must be taken seriously.
Insolvency can happen even when a business still appears strong on the surface. A company might own valuable assets but be unable to generate enough cash flow to pay suppliers or HMRC on time. Equally, balance sheets that show more debt than assets signal a deeper structural problem. Either way, these tests are designed to protect creditors and ensure directors face reality.
Recognising insolvency early matters. Directors who ignore warning signs not only risk the survival of the company but may also expose themselves to personal liability. Once insolvency is clear, exploring solutions like a CVA becomes essential.
What Makes a Business Suitable for a CVA?
A CVA works best when the company has a profitable core operation but is struggling with temporary financial pressures. It is for businesses that can still win orders, serve loyal customers, and deliver value, but need time and breathing space to address debts. If the market still wants your product or service, you already meet one of the most important conditions.
Creditor support is another factor. For a CVA to succeed, creditors must see the proposal as reasonable and fair. They need confidence that repayment is achievable and that supporting the plan offers them a better outcome than forcing liquidation. This is why transparency, trust, and a carefully drafted plan are so important.
Directors’ commitment is the final piece of the puzzle. Restructuring often means reducing costs, renegotiating contracts, and taking difficult decisions about staff and operations. Without firm leadership, even the best-designed CVA will fail. The process demands energy, clarity, and persistence from those in charge.
The Role of Viability in Restructuring
A CVA is not about prolonging the life of a failing business. It is about creating a pathway for a viable company to overcome a short-term financial crisis. That viability rests on a handful of key factors. The first is profitability at the core of the business model. If the company’s products or services are fundamentally unprofitable, no restructuring can turn things around.
The second factor is realistic cash flow forecasting. Directors must prepare projections that stand up to scrutiny. Over-optimistic numbers erode creditor trust and increase the risk of failure. Honest forecasting, supported by robust assumptions, builds credibility and demonstrates that directors are facing facts.
Cost reduction also plays a role in viability. Businesses must be able to streamline operations, cut waste, and manage overheads effectively. If cuts cannot be achieved without damaging the core business, the CVA may not deliver the breathing space required. Viability comes from balancing lean operations with the ability to meet future demand.
Why Directors’ Decisions Matter Most
Directors hold the steering wheel in any turnaround. A CVA keeps control with the existing management team, but that control comes with heightened responsibility. Directors must act in the best interests of creditors once insolvency is clear. Failure to do so can lead to disqualification, fines, or even personal liability.
Making the right decisions means facing uncomfortable truths. This might involve closing unprofitable divisions, selling non-core assets, or renegotiating onerous contracts. It often means communicating hard messages to staff while keeping morale alive. Leadership under pressure defines whether a business emerges stronger or collapses.
The best directors embrace external advice. Turnaround specialists and experienced advisors can help shape proposals, negotiate with creditors, and build confidence in the plan. Trying to go it alone often leads to poorly drafted arrangements that fail to gain approval. Strong leadership is not about knowing everything but about drawing on the right expertise at the right time.
Taking the Next Step
If your business is experiencing cash flow stress, pressure from creditors, or HMRC arrears, exploring a CVA could be the right move. The key is to act early and not wait until creditors lose patience. The longer directors delay, the fewer options remain on the table.
Open dialogue with creditors helps build support. Transparency about challenges and clarity about the recovery plan encourage cooperation. Creditors do not expect perfection, but they do expect honesty and evidence that directors are serious about repayment.
Above all, directors must recognise that insolvency does not have to mean failure. A CVA can be a turning point, allowing businesses with a strong core to recover, restructure, and return to growth. Taking advice early and acting decisively can make the difference between survival and collapse.
Summary:
This blog explores when a business is suitable for a Company Voluntary Arrangement (CVA), the tests of insolvency, the role of viability, and why directors’ leadership is critical. Learn how CVAs can help businesses restructure debt, maintain control, and secure a future.