Company Voluntary Arrangements Offer Scope for Saving Insolvent Companies #007

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Published on 2 November 2010 by Tony Groom

Company Voluntary Arrangements Offer Scope for Saving Insolvent Companies

A CVA (Company Voluntary Arrangement) is a powerful tool for restructuring the

liabilities of an insolvent company, but it does not, in itself, save the company unless

the business is viable.

A CVA is an agreement between an insolvent company and its creditors. Therefore a

thorough business review is also needed to support the CVA by establishing that the

business can be profitable in the future.

The arrangement is a legal agreement that protects a company – essentially giving it

some time or a breathing space by preventing creditors from attacking it.

It allows a viable but struggling company to repay some, or all, of its historic debts

out of future profits, over a period of time to be agreed, and allows the company’s

directors to stay in control of the company.

CVAs allow a company to improve cash flow quickly, by removing pressure from tax,

VAT and PAYE authorities and other creditors while the CVA is prepared. They can

also be used to terminate employment contracts, leases, onerous supply contracts

with no immediate cash cost. It is a relatively inexpensive process.

A company can be protected from an aggressive creditor while a CVA is being

proposed and constructed. It can stop legal actions like winding up petitions. In case

law, providing a creditor has less than 25% of the overall debts of the company then

they can be required to consider the proposal even when a winding up petition is

issued.

K2 Business Rescue The Emergency Service for Business

Call Tony Groom on 0844 8040 540

Ultimately it is also a good arrangement for creditors as they retain a customer and

receive a dividend on their debts, which might otherwise be written off in the event

of liquidation.

However, it is not a do-it-yourself option for a struggling business but should only be

entered into with the help and guidance of an experienced business rescue adviser

with the tools and knowledge to help turn around struggling companies.

The business rescue adviser will review the business thoroughly to establish that it is

viable. That means examining the accounts and business plan, identifying any

underlying weaknesses and thoroughly understanding the company’s activity, offer,

culture and market.

Once it has been established that the company can be turned around, given time,

the rescue adviser will produce a turnaround plan and draft the CVA to deal with

the creditors.

There is no legal minimum payment or dividend. The law simply lays out a method for

offering a deal to the company’s creditors. This is known as a CVA. The amount the

company pays back to the creditors under the CVA should always be based upon

affordability not some arbitrary number. It is often a programme of payments over a

period of years, but it could be a lump sum payment upfront or other proposal

acceptable to the creditors.

For example, one recent example, a property company agreed a CVA with

creditors on the basis that no payment would be made until property was sold. But in

order to realise value, planning permission for a change of use to a residential

scheme was required to increase the value of the property. Once sold, this was

expected to pay creditors 70p in the £1, whereas otherwise they would have

received nothing.

The company’s bank is normally a secured creditor whose rights are not affected by

a CVA. They normally do not appoint an administrator under their rights as a

qualifying floating charge holder where the CVA proposal is realistic and the

emerging business is viable. However, normally the local bank manager will pass on

the relationship to a special management unit.

HM Revenue & Customs (HMRC) have a specialist team that deals with CVA

proposals. They generally support a well-considered CVA proposal although they

have a large number of standard modifications that an experienced rescue adviser

will have covered when drafting the proposal. CVAs offer the opportunity of having

a much longer repayment period than could be agreed under their TTP (Time to Pay)

scheme. Furthermore a CVA can allow for paying less than 100% of the debt due to

HMRC whereas a TTP arrangement requires 100% to be repaid.

K2 Business Rescue The Emergency Service for Business

Call Tony Groom on 0844 8040 540

Far too often companies that are struggling with liquidity in the short term, as many

currently are because of the global economic downturn, find themselves facing

winding up petitions in the high court, often from the HMRC following many

communications over unpaid tax that have been ignored.

Without proper advice and guidance companies that are actually viable on closer

examination despite their current problems find themselves forced into insolvency

when they could actually be saved with the help of a CVA.

We are not Insolvency Practitioners. We operate within the law to protect our clients and their wealth. Our team has worked for over 20 years to help stabilise and return hundreds of businesses to profitable growth. Once appointed, Insolvency Practitioners do not work for you, they work for creditors and use your company’s assets to pay themselves. We work for you, not creditors.

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Need Immediate Help – Call Tony Groom on 0844 8040 540