We looked at the implications of liquidating your company if it is insolvent and unable to continue trading.
But liquidation is not your only option.
Maybe you just need a bit of breathing space in order to sort out the company’s finances and catch up with payments. But how do you get your creditors to agree calling off the hounds?
A Company Voluntary Arrangement (CVA) may be your answer. This is also a voluntary arrangement made by the Directors involving a licenced Insolvency Practitioner (IP). The key difference here is the company isn’t liquidated, but instead terms will be agreed with existing creditors to write-off some of what is owed to them and spread payments for the remainder over a number of years. Such new terms will need to be affordable, realistic, and manageable.
Why would your creditors agree to this? Well if a company is insolvent and unable to pay its debts, your creditors may prefer to receive 50% of what they owed as opposed to nothing.
We have all experienced the situation of a company who owes us money going into liquidation. Initially we are sent something called a statement of affairs which suggests that when the liquidation is complete, we will get (say) 42% of what we are owed.
A year later we receive another letter from the liquidator. It turns out that many of the people who owed the company money disputed what they owed so the liquidator did not collect anywhere near the amount that they initially expected. And it turns out that a lot more work was required by them in dealing with a whole range of issues they weren’t aware of at the outset. Oh, and when they sold the assets via their agent, they got nowhere near the book value.
Unsurprisingly, by the time the second anniversary arrives, the money collected has just about covered the liquidator’s fees and there’s nothing left for the creditors.
Occasionally, there’s a disreputable business owner behind the whole thing but often there’s a business owner who certainly didn’t want their suppliers to end up losing out completely. “I’d like to be able to walk round Tesco’s without worrying I’m going to bump into someone who had a bad debt from my company” as one of my clients said!
Often a CVA is a good outcome for both the creditors and the business owner who protects their reputation. Plus, existing contracts with customers can usually continue.
For a CVA to be successful, you, your accountant and a good insolvency practitioner will work together to prepare a proposal that will be sent out to your major creditors along with details of a meeting of creditors which will be held. This proposal must be approved by 75% in value of your creditors for the CVA to go ahead.
This would hopefully be them outright accepting the proposed terms, or possible accepting with slight modifications. Once the CVA has been approved, all creditors are bound by this agreement.
The appointed Insolvency Practitioner will take control of these arrangements and oversee the restructuring. This means the Directors do lose an element of control, but the business lives on and can continue to trade.
Data for the insolvency industry suggests that roughly 50% of CVAs make it through the payment period (usually four years). Our record at A4G is much higher than that and we like to think that the difference is that our input ensures that the businesses concerned make the necessary changes so that they are profitable going forward and don’t make the same mistakes as were made before.
Crucially, it is best to take advice early. The longer you leave it, the higher the chance you will have to shut the business down. There is no shame in going through this process and most IPs will give you a free consultation which will hopefully put your mind at ease.
If you would like to discuss a CVA with us, please contact one of our Principal Advisers on 01474 853 856 and we can talk through the key issues for you and introduce you to our preferred Insolvency Practitioner if you wish to go further.
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Malcolm Palmer FCA | Managing partner
01474 853856 | Malcolm.email@example.com | Send me a message