A Company Voluntary Arrangement (CVA) can be an excellent
Negotiating with unsecured creditors
For a CVA to be approved, it has to be accepted at a formal meeting by 75% of your unsecured creditors, and their agreement will obviously depend on the deal you offer. It is therefore worthwhile approaching your key creditors at the earliest possible stage, in order to gauge their reaction to your thinking. If they reject your proposals, this will give you the time to think again and come up with a new offer. In contrast, if their response is positive there’s a good chance that your Company Voluntary Arrangement will be accepted. Along the way, there may be some negotiation, but bear in mind you will not be allowed to make a proposal that your company cannot afford.
Dealing with banks and HMRC
Once in place, the CVA is binding on all your unsecured creditors, regardless of whether they attended the meeting and of however they voted. It does not apply to secured creditors, such as banks, who can still press for your business to be liquidated. Unless the CVA is particularly disadvantageous to them there’s a strong chance they will allow it to proceed.
HMRC’s position is more tightly governed: they have a legal obligation to provide the best possible outcome for taxpayers. As a result, they are generally amenable to CVAs and have extensive experience of dealing with companies implementing the process.
As “involuntary” creditors, HMRC’s main concern is whether they will incur further losses and whether future tax debts will accrue. Your insolvency practitioner will therefore need to prove that you will meet your tax obligations in the future, without building up substantial arrears.
Dealing with excluded creditors
Whilst a Company Voluntary Arrangement generally requires the inclusion of all your creditors, it may be possible to conduct separate negotiations with some of them and exclude them from the arrangement. These negotiations can be particularly delicate and should be handled by a qualified professional.
Next steps after approval
Once your creditors have agreed the CVA, responsibility for managing them passes to a designated Supervisor, leaving you free to concentrate on running the business. At this stage, your sole responsibility with regard to the CVA is to ensure that the company generates sufficient funds to make the agreed contributions.
Managing your suppliers
Of course, this doesn’t mean that you immediately return to business as usual. Since your suppliers will only be receiving a proportion of the money you owe them, they will be much more cautious when doing business with you. Whilst it is unlikely that they will refuse you service altogether, they will almost certainly change your terms of business, implementing shorter payment schedules or even requiring payment upfront. Make sure you pay all their future invoices on time and in full, as you will need to build goodwill with them in order to return to your previous credit terms.
Managing your employees
Chances are your employees will learn about the Company Voluntary Arrangement at an early stage and they will naturally be fearful about their jobs. It is thus important to communicate with them and emphasise that a Company Voluntary Arrangement does not mean liquidation – on the contrary, it is a way to protect their jobs and keep the company going. You might wish to cement their loyalty by putting in place a bonus scheme that rewards them (whether financially or in some other way) when the CVA is successfully concluded.
Separating the myths from the facts
Finally, it’s useful to put a few myths about CVAs to bed. Some entrepreneurs believe that creditors are prejudiced against them and would prefer to force debtors into liquidation. Experience shows that this generally isn’t the case, with most unsecured creditors taking the mature view that they would rather receive something than risk receiving nothing.
Similarly, as we’ve already pointed out, most suppliers won’t try to exact revenge by refusing to deal with you again. Business is business, and provided you don’t repeat the same mistakes you should be able to maintain your supplier base – though it probably won’t be on the same terms.
It’s also untrue that HMRC has an institutional bias against CVAs. In fact, they have a specialised unit that does nothing but deal with them. Certainly, they have a standard set of requirements that your CVA will need to meet and they won’t give way on these red lines, but in general they’re pretty reasonable to deal with. Just make sure you fill them with confidence that you will modify your behaviour and not fall behind with future tax returns and payments, and all should be well.
And of course, some business owners are deeply concerned about how customers will react. The truth is that most of them will never discover you have entered into a CVA. From their standpoint it will simply be business as normal, as a CVA is a private arrangement between yourself and your creditors. Even if they find out, they’re unlikely to react by switching to different suppliers. If you’re continuing to meet their needs and give them good deals, why would they?
So if you’re staring into the financial abyss, you need to stop worrying and start acting. A Company Voluntary Arrangement is a great way to stay in business and stay out of the bankruptcy court.