INTRODUCTION

Having worked within the financial sector for a number of years, we have learned to appreciate that many businesses are struggling to keep afloat due to lack of support from their banks, bad paying clients failing to honour their debts, increasing competition and a number of unforeseen problems encountered.

This can lead to the company becoming insolvent.  There are two terms of insolvency:

(a)    The company’s liabilities outstrip its assets.

(b)    The company cannot pay its debts as and when they fall due.

One of the duties of a director is to recognise when the company is insolvent, and it is a legal requirement of the directors to take immediate action to remedy the situation.  Failure to do so could lead to the prosecution of the directors should the business be forced into a compulsory liquidation!

There are several options open to directors, however the option that we deal with on this page is a C.V.A.

WHAT IS A C.V.A.?

 C.V.A. (Company Voluntary Arrangement) is a formal procedure under the provisions of the Insolvency Act 1986.  It allows directors to put forward proposals to the company’s creditors for a settlement of its debts.  The settlement does not have to be at 100 pence in the £, but the attraction to creditors is that the dividend is invariably better than Liquidation would offer.

The proposals comprise a series of formal documents setting out the directors’ strategy for repaying creditors.  This might include one or more of the following:

-          an orderly disposal of some or all of the business;

-          an introduction of additional capital;

-          the closure of an unprofitable part of the business;

Or

-     the freezing of historic debts, while the ongoing business generates profit, and pays a monthly contribution that is affordable over a period of up to five years.

In essence, the C.V.A. offers a chance for the company to survive under the control of the existing directors as an alternative to the final action of liquidating a potentially viable company.

HOW DOES A C.V.A. WORK?

The first stage, as with most problems, is for directors to recognise and admit the difficulties the company is in and to seek advice.  By law only licensed Insolvency Practitioners (IPs) can act in relation to a C.V.A. and the sooner a struggling company seeks advice, the better the chances of its survival.

If a C.V.A. is deemed appropriate, the (IP) drafts the detailed proposals on behalf of the directors, which sets out the deal being offered to creditors.  This is a complex document which is supported by a statement of affairs and list of creditors.  The (IP) also has to prepare a report advising whether he believes the proposals are sensible, and stating whether in his opinion, a creditor’s meeting should be called.

Once these documents have been prepared, they are deposited with the Court.  However, unlike the procedure for an Individual Voluntary Arrangement (I.V.A.),

The Court does not grant an Interim Order, which for individuals gives temporary protection from creditor action.

The (IP) who is now formally referred to as the Nominee, then circulates the proposals to creditors and convenes a creditor’s meeting.

This meeting, usually called at 14 days notice, is critical in that it is the creditors who decide whether the proposals should be accepted.  Votes are considered by value of debt, and a majority in excess of 75% by value of the votes cast at the meeting is required.  Creditors can vote by personally attending the meeting, or by posting a proxy form.  Only unsecured creditors can vote.

If those creditors who do vote accept the arrangement, then all of the company’s unsecured creditors who were circularised are bound by this decision.  This applies to all notified creditors, even if they themselves voted against the proposals.

By way of simple example; a company may have unsecured debts of £100,000 owed to 50 suppliers.  If only two creditors voted by proxy, one in favour for £9000, and one against for £1000, then all 50 creditors would be bound by the arrangement, because 90% of those who did vote, accepted the proposals.

Upon acceptance, providing the company complies with the terms and conditions of the arrangement, the creditors are bound by the arrangement for the time specified and can neither take or continue any legal action, nor add interest or surcharges to their claim for this time.

SUMMARY

A C.V.A. offers companies in difficulty an opportunity to trade out of these problems.  By getting creditors’ approval to specific proposals, directors are given an opportunity to carry on running their business.

This can lead to a better return for creditors, and the rescue of a company with a second underlying business.  As a spin off, employees have a better chance of avoiding redundancy, and suppliers have an opportunity to maintain ongoing trade.

If the procedure is correct for the company and advice is sought early enough, our experience shows that there is a good chance of success.

What if the C.V.A is rejected?

Our experienced consultants are available to discuss what further options are available in the event of a rejection.

WHAT NEXT?