No company wants to admit that they are going through a financial crisis. It is important however to take the right steps to ensure that you do not end up worse off. There are several options available for directors and business owners to ensure they take control of their financial issues before they become out of control.
Company Voluntary Arrangement
Often referred to as a CVA, it is a legally binding agreement between a company and it’s creditors. This agreement helps a company to pay back portions of its debts in a manageable way over time.
A CVA is an option for a company director, who is financially viable but failing to keep up with cash flow.
A CVA has to be arranged with a licensed insolvency practitioner. Their job will be to help you prepare what you offer to the company’s creditors. Then if your CVA offer has been approved the practitioners will then help supervise and monitor the arrangement.
So what are the benefits?
If your company or business is struggling then a CVA could be the more appealing option. There are some benefits to taking out a CVA:
- Unaffordable company debt will be written off
- You, or the directors, will remain in control of the company
- Paying off debts will be in one single monthly payment
- The company may be able to terminate expensive leases and contracts.
- Allows restructuring of the business, with the chance of trading to continue.
Bankruptcy to most is the final option for those that can not pay back their debts and there is little to no chance of that individual’s circumstances improve.
This a way of becoming debt-free. This can be a voluntary move or it can be enforced by creditors you might owe after they petition the court to place the order. This is usually when creditors are owed at least £5000 and see no chances of receiving this money.
To declare yourself you would normally pay a fee of £680, this will cover application fees and a deposit.
Bankruptcies are usually handled by an official receiver. These are people that manage the process. The official receiver will be tasked with collecting and protecting assets owed to creditors. They also keep the communication between the insolvency practitioners, creditors and the individual declaring bankruptcy.
They will also help to determine the terms of the bankruptcy, this includes the length of time the individual will be bankrupt and what will happen to the assets.
To some the appeal of being debt-free makes declaring yourself bankrupt can seem like an attractive option. However, this is not the case. Bankruptcy comes with a list of pitfalls:
- Personal assets can be sold off, this includes houses and vehicles you might own.
- Any businesses running under your name will most certainly be closed down
- Monthly payments may still be required and this can be for up to 3 years.
- A notice of your bankruptcy will be advertised.
- You will not be allowed to be a company director.
- If you are renting the property you live in, your landlord will be notified.
- Your credit rating will be affected for at least 6 years.
Self Employed IVA
An IVA is an individual voluntary arrangement. This is where an individual who is struggling to pay off debts enters an agreement with creditors to pay off a percentage of the debt over 5 years.
Now a self-employed IVA is the same but is for those who are self-employed in their own business. Similar to a CVA that an arrangement will be made between the individual applying for one and the creditors they owe money too.
A licensed insolvency practitioner will be the one that helps with a person wanting to take out a self-employed IVA. The terms of the IVA means individuals would need to make one monthly payment back to the creditor to help manage the payments. This would only be what is affordable and typically means most people who take out an IVA are after 5 years.
The benefits of taking out a self-employed IVA are similar to that of taking out a CVA:
- Any legal actions taken against the individual will be stopped. This could be CCJ’s (county court judgments) and Bailiffs.
- Any interest and late fees owed will be frozen.
This is usually the last resort for a company. Liquidating a company or business usually involves the complete closure of trade. There are a couple of ways a company can be liquidated one is a Creditors Voluntary Liquidation and the other is with a winding-up order.
A Creditors Voluntary Liquidation is a process used by Directors to close down their companies or businesses. This is when they can no longer afford to pay off their debts to creditors. A CVL will commence when a licensed insolvency practitioner is appointed as a liquidator.
A liquidator’s role is to scale up the value of the business and its assets. This will then be distributed to creditors to pay off some of the debts that can not be paid. Once all the assets are sold off the liquidator will then close down the company.
Next, there is a Winding Up Order. This is different than a CVL in the sense that this is when creditors apply for a winding-up petition due to debts not being paid. When creditors see no hope in getting the money they are owed. Then they can apply through HM Revenue and Customs to demand the closure of your company.
When a winding-up petition has been accepted then a winding-up order will be placed against the company. This is a court order that can force a company into liquidation. This can be resolved, however, when a petition is first applied for then you as a business owner are given the option to pay off the creditor what has taken out the petition. Or you can challenge the petition should you feel it is unfair.
It is important to act quickly though when a petition is made as they are easier to resolve. Once a winding-up order is given this makes resolving the issue much more difficult.