These are tough times for many, with the global economy in the grips of a deep recession, inflation and unemployment at unwelcome levels and more and more people caught up in a spiralling trap of debt – loans, credit cards and mortgages that they are now struggling to repay on top of the cost of everyday living.
For those who find themselves in a financial blackhole that is getting worse every month, there are legal safeguards in place to provide them with the chance of starting again financially with all debts erased (personal bankruptcy) or of bringing their debt under control, often through reaching an agreement with the creditors to reduce the overall size of the debt in return for commitment from the individual to a structured repayment plan. These agreements include debt management plans and ‘individual voluntary arrangements’, commonly known as IVA’s.
IVA’s are becoming increasingly commonplace, but their equivalent in the business world, the Company Voluntary Arrangement, is still relatively unknown – especially to those that could benefit the most from them.
A person proposing to do an IVA can apply for an interim order in court. This protects them against any legal action which may be taken against them by anyone they owe money to. Similarly, a CVA gives the company legal protection from its creditors who are unable to take further legal actions as long as the terms of the CVA are adhered to, and existing legal action such as a Winding Up Order ceases.
In short, a CVA is a contractual arrangement with the Company’s creditors to repay them (either in full or part) over an agreed period of time. At the end of the payment plan, any unpaid debt is written off and the Company effectively starts afresh. They are designed to preserve a business whilst protecting and, importantly, helping cash flow (in that immediate pressure from creditors to repay debts is relieved, allowing the company to focus on its operating costs).
A Company Voluntary Arrangement can only be implemented by an insolvency practitioner who will draft a Proposal for the creditors. A meeting of creditors is held to see if the CVA is accepted.
A CVA is accepted if each of the following three conditions are met
1. More than 75% of the creditors (by debt value) agree
2. More than 50% of ‘unconnected’ creditors agree i.e. that have no connection to the company other than that of creditor.
3. 50% or more of the shareholders agree
All the company creditors are then bound to the terms of the proposal whether or not they voted. Creditors are also unable to take further legal actions as long as the terms are adhered to, and existing legal action such as a Winding Up Order ceases.
The advantages of a CVA
• The CVA stops creditors taking any further court action against the company. No further county court judgments or winding up procedures can be issued
• It is possible to continue trading without customers finding out that the company is in a CVA – unlike liquidation where public notice is a legal requirement.
• In some cases a significant amount of the company’s debt is written off thus easing cash flow pressures and enabling the business to continue to trade.
• The cost of implementing a CVA is minimal. Generally fees are taken directly from the agreed monthly payments and the directors are not required to raise additional funds.
• A liquidator is not appointed and the business continues to trade. If the business were to go into liquidation, the directors would be investigated for their conduct in the events leading up to the liquidation, in particular whether they were guilty of wrongful trading whilst insolvent.
The disadvantages of a CVA
• The company’s credit rating will be negatively affected thus making additional borrowing while the CVA is in place difficult.
• It may be difficult for the company to begin new contracts with new clients if they base their buying criteria on the financial stability of the business.
Basic Steps of the Procedure
• The CVA can be proposed by the directors of the company or the company’s Liquidator/Administrator.
• The procedure is administered by a Licensed Insolvency Practitioner (the Nominee)
• A study of the company and its position in the marketplace is made. Its business model is assessed and a detailed profit & loss and cashflow forecast assembled on which to base a repayment plan to the creditors. The plan involves single monthly payments to a trust account managed by the Nominee who then distributes it to the creditors.
• The repayment plan may be for 100% of the debt or the creditors may agree to write off x% of the debt in return for the company adhering to the repayment schedule.
• Directors & secured creditors debate the proposal.
• After the proposals are complete, the Nominee needs to prepare a report on the proposals which includes comment on the due diligence they have undertaken to ensure that the CVA proposals are accurate, reasonable and achievable.
After the Filing of a CVA Proposal
• Once filed at court, the proposal is sent to the creditors.
• A meeting is chaired by the advisor or an IP with all creditors (or agents of creditors) at which the creditors vote on the proposal.
• Creditors may request modification of the proposal, which will need to be approved by vote.
• A shareholders meeting is held requiring 50% vote in favour of the CVA Proposal.
• At approval the meetings close and a report is issued by the chairman within 4 days.
• Once approved, all creditors are legally bound by the proposal.
A CVA can seem unpalatable if you own your business and do not find attractive the idea of having your finances scrutinised and organised (albeit with your input and agreement). However if the alternative is the mounting prospect of legal action from your creditors, including the ultimate sanction of a winding up petition, then the benefits of a CVA are placed into perspective. Indeed CVA’s have been successfully used to halt winding up proceedings that had already been initiated – the creditors recognising that it is better to paid off over a longer period of time than to force the immediate shutdown of the business and only receive a fraction of what they are owed.
In everyday terms, it means the management of a business can refocus on running the business profitably rather than constant firefighting in dealing with the various creditors.
A CVA is often the most appropriate solution for a business that knows it is viable and can trade its way back into profit and surplus cash, but has such significant debt so as to hamper its everyday running. The CVA reorganises the business’ debt and obtains ‘breathing space’ for it to get back on its feet until cashflow becomes a virtuous cycle.
By HAMILTON BRADY LTD,
Tel: 0844 873 6081
Address: Springfield House
Water Lane, Wilmslow, Cheshire, SK9 5BG.
Disclaimer: The above article is meant to be relied upon as an informative article and in no way constitutes legal advice. Information is offered for general information purposes only, based on the current law when the information was first displayed on this website.
You should always seek advice from an appropriately qualified solicitor on any specific legal enquiry. For legal advice regarding your case, please contact Hamilton Brady for a Consultation with a Solicitor on 0844 873 608.