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When company voluntary arrangements (CVAs) become an option

This blog post will serve as a guide to this procedure, discussing when and how it may come into force. We are also going to consider how it relates to the wider issues of restructuring and insolvency in the UK.

iBusiness Blog - Biz voluntary

When is a company deemed to be insolvent?

To identify a business in financial strain and ascertain if it insolvent or not, you need to consider whether its assets are sufficient in meeting its debts and liabilities. A cash-flow insolvent company is one who cannot pay its debts as they fall due, while balance sheet insolvency is where liabilities exceed its total assets.

The risks this poses to directors

Directors of an insolvent business are duty bound to consider their creditors rather than shareholders. The actions taken in this situation should be considered very carefully and specialist advice is always recommended.

This is because should the company then go into liquidation or administration, the directors can be sued for any creditor losses if trading is continued throughout the insolvency period. As well as wrongful trading, directors can be reported to BERR (Department for Business, Enterprise and Regulatory Reform) by the liquidator/administrator or face being disqualified for their conduct.

In addition to the risks mentioned above, directors may also be liable for breaches of duty to the business.

The possible options

An insolvent company may decide to go into administration, with a qualified insolvency practitioner (IP) taking on the management of the business. During this time, the company is protected against creditors claiming the money owed to them. This administrator looks to reorganise it or sell some of its assets.

Alternatively, a liquidator (qualified IP) takes control of a company’s assets and usually ceases trading. They will then sell the assets, distributing the proceeds amongst creditors.

With receivership, a receiver may be appointed by the holder of security over the assets of a company and they are tasked with selling these assets with the proceeds passed to the charge-holder of the secured debt.

The final option is a compulsory voluntary arrangement, which we will be looking at in more detail throughout the remainder of this article.

What actually is a compulsory voluntary arrangement (CVA)?

A CVA is a procedure that enables a company to settle the debts it owes by offering to pay a proportion of the total amount owed to its creditors. It is also designed to ensure the business manages to settle on an arrangement with those it owes money to, in relation to these debts.

When it might come into force

The process is open to limited companies that are insolvent, as it offers a legal means of paying money to creditors within a fixed period of time. As long as this is agreed, the business can carry on trading. The procedure is different to an individual voluntary arrangement (IVA) applicable to the self-employed and sole traders.

Applying for this procedure through an insolvency practitioner

All the members or directors of the company or limited liability partnership (LLP) need to be in agreement before an application can be made. However, a CVA is only possibly by going to a licensed insolvency practitioner who will deal with the costs involved and administer the arrangement.

The next stage in the process

It is then up to the insolvency practitioner to work out an arrangement that covers the debt amount you are able to pay and a schedule detailing how often these payments will take place. The CVA specialist has a period of a month from their appointment in which to achieve this.

The IP will also write to each creditor about the proposal, inviting them to attend a meeting where they will be given the opportunity to cast a vote.

The CVA will need approval by creditors owed at least 75 per cent of the total amount (either in person or by proxy).

What happens now?

Once a CVA has been given the go-ahead, the business is deemed to be solvent and can begin to trade again. In the meantime, the scheduled payments need to be made to creditors via the IP until the debt has been fully paid.

If creditors do not agree and the 75 per cent vote by value isn’t reached, the company may face voluntary liquidation.

Remember, even if you do get the CVA, you need to meet the payment terms agreed upon. By failing to adhere to the schedule, this gives any of the creditors the freedom to apply for your business to be wound up and the balance of the debt due to them.

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