Company Voluntary Arrangement - CVA
So what do you do if you cannot raise finance to ease severe cashflow problems?
Times are hard for business, and companies may find themselves facing a range of financial difficulties. Most company directors are quite understandably concerned about the stigma of a possible insolvency. They are often particularly worried about letting their staff and suppliers down and about the personal embarrassment from within their trade or word getting out to their friends. It is for this reason that they tend to leave seeking professional advice until very late in the day.
If your company is experiencing severe cash flow problems or you think it will be facing problems in the near future and you cannot raise sufficient finance you need to seek professional advice. A licensed Insolvency Practitioner will quickly be able to tell you the best way to help save your business from insolvency.
It is a common misconception that insolvency practitioners are only interested in closing down businesses but they are, in fact, more interested in saving or preserving, not destroying your business. It is unlikely that you will have either the financial or legal knowledge to solve your own business problems but a professional will be aware of all the options and will have the experience to quickly work out which solution is most likely to save your business. Remember what may appear to be a terminal problem to you is an everyday occurrence with a likely solution to a specialist in this field.
Avoiding Insolvency
The preferred way to deal with insolvency is to avoid it. However if you can't then it is imperative that you get help as early as possible. You can never get help early enough.
Turnarounds hinge on you having a period of time in which to implement the necessary changes: cutting costs; renegotiating deals with suppliers; raising your profit margins; diversifying; downsizing or retraining staff takes time-and time is the commodity you need to value the highest.
Finally, to avoid insolvency never do nothing. Doing nothing is not an option. Many organisations try to battle on alone. You can work all the hours in the day or week with good intent but it only takes one creditor to put in a winding up petition and your bank account will be frozen. That's when your business will really suffer as it is almost impossible to trade without a bank account.
Saving your Company
Do you have the following concerns?
Trade creditors, Inland Revenue and VAT are threatening the survival of your business. Additional or further finance cannot be found.
Is the following true?
Your business could survive if it had breathing space from its creditors. You have now corrected the problem in the business and, if given some time and working capital, your company could succeed.
If the answers are yes, take action. Take advice.
Directors Responsibilities
You must take charge of the situation before some one else does. The difference between the two is enormous and the effects are dramatically different. You must be able to justify your actions and the long term consequences of your decisions as a director.
It is an offence to continue to trade whilst the company is insolvent, this is defined as wrongful trading. Similarly, it is an offence to create a preference; preferring one creditor above another, particularly a related party.
Remedial action
One possible solution is a Company Voluntary Arrangement (CVA). This is particularly suitable for a company that has had a problem which has now been resolved and although the company is once again trading profitably, it is being strangled by debt.
A company Voluntary Arrangement is a recognised legal procedure under the provisions of the Insolvency Act 1986 that enable a company to enter into a binding agreement with its creditors detailing how the company's debt and liabilities will be dealt with, and allows the directors to retain the control of the company. In essence a CVA allows a company with cash flow problems to repay its unsecured liabilities, including the Inland Revenue and HM Customs and Excise, by entering into the binding agreement with its creditors. The basis of the CVA is to repay what the company can afford-which can result in either a part or full repayment to creditors- over a fairly long period of time, usually 2-5 years. Typically, once the company's liability has been restructured, any monies generated or owed to the company can be used as working capital rather than to pay its old debts.
A company with cash flow problems will be juggling every cheque it receives in an effort to stay within its overdraft limit, pay its creditors, maintain supply, and on top of this pay overheads and salaries. In a CVA current income and debtors' payments can be used to take the company forward, whilst maintaining monthly repayments on old liabilities. This type of arrangement can provide a large injection of free and available new working capital. Companies will also feel that the air of doom and gloom has been lifted from the workplace. The key advantage of a CVA is that the directors are free to continue to run their business, the employees keep their jobs and creditors will be in a better position than if the company had gone into liquidation.
How is a Voluntary Arrangement implemented?
A CVA requires the approval of 75% of the voting creditors. If approved, the CVA binds all creditors who were sent notice of the meeting, irrespective of how they voted.
How much does the company repay its creditors?
Having reviewed the financial position and the company's prospects the directors (and to some extent the insolvency practitioner) calculate what the company can afford to pay, normally on a monthly basis, into a fund which is supervised by the insolvency practitioner.
Will the bank, VAT and Inland Revenue support the CVA?
Provided that the proposal of repayment that is put forward is reasonable then normally these creditors are prepared to accommodate the CVA. However the crown creditors will only support an arrangement if all VAT and tax returns are up to date.
Will suppliers still supply the company?
Even though most creditors say otherwise, under most circumstances suppliers will still supply to a company in CVA. Remember that these companies also have cash flow requirements and generally cannot afford the luxury of turning down business.
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