Whilst it is true that a lot of businesses fail in a recession and some do deserve to go down,
a lot more businesses actually don’t deserve to fail. In this kind of economic climate it can be extremely hard for a business (especially if it is a small one) to survive and to prosper. So, as a by-product we often see businesses go under that under other circumstances would do well.
It is a shame that businesses that could potentially be going concerns have to go under in this way. But, this doesn’t always have to happen. Nowadays a lot more businesses are following consumers and are using a CVA (Company Voluntary Arrangement) to help them take control of their debts rather than to simply give up and close the business down.
Like the consumer IVA
(Individual Voluntary Arrangement) a CVA allows a business to schedule a period of debt repayment that pays off some of their borrowings with the remainder being written off when the CVA is done. The key factor here that makes this such an attractive option for business owners is that the business can carry on trading and does not have to close down during the process.
This kind of solution cannot be used by every business and there are conditions that need to be met before you can make an application for a CVA. So, for example, you may actually need to show evidence that your business has good future prospects and that it could well be a going concern in the future. And, you are likely to need to be at the stage where your business is technically insolvent.
Let’s take a look at how the CVA process works.
The biggest benefit to a CVA
- You will need to take on a licensed Insolvency Practitioner (IP) to manage and administer your case. This is not something that you or your employees can do on their own. You and your IP will need to sit down together and work through your current business situation so that he/she can assess where all of your debt problems lie. They will also be looking at how viable your business will be in terms of profits over the coming years. This is an important factor as it will be your future profits that pay your CVA commitments. Be prepared to put together full and frank business documentation here including business plans, financial forecasts and analysis documents.
- Once your IP has a handle on your business and where you are financially then he/she can work out how much you can offer to your creditors as payment towards the debts that you owe. You will then agree a proposal that will be submitted to all your creditors that shows them how much they can expect to be paid through the CVA.
- Your IP will then contact your creditors and invite them to a meeting to discuss your proposal. It is important that you get approval of your CVA proposal from the percentage of creditors that hold 75% of the value of your debts otherwise your proposal will not be approved. If you also need to have a shareholder meeting then you may need a 50% approval rate here as well to get your CVA in place. Creditors often view CVAs in the same way as they view IVAs in that getting some money back is better than nothing and if you show them that they will get a fair rate of return then there should be no issues here. Do bear in mind that CVA creditors may well be more stringent than consumer IVA creditors and may want a higher ‘penny in the pound’ return.
- Your CVA can now be set up and its payments administered. This will be done by your Insolvency Practitioner. Once the CVA is approved you and your creditors have to stick to its terms. This is a legally binding agreement that is usually set out to last for five years.
is that it could help your business survive when you were worried that it might fail. This kind of debt management solution will give you breathing space until your company starts to achieve its potential again and could help you eradicate all of your company debts completely in just a few years.
Do be aware that there are also some disadvantages here as well. For example, if you do not or cannot stick to your proposed agreement with your creditors during the CVA term then they can take action to have your business closed down once and for all. This kind of solution cannot also be used for all kinds of debts – in general terms they cannot be used for secured borrowing which you’ll have to handle separately.
In some cases you may also find that putting your company under a CVA order will knock confidence in your company in the market. So, you may find that suppliers will not give you the same/any lines of credit, especially if they are creditors included in your CVA.
But, to be honest, if you believe that you are going to have to close down your business even though it could be a going concern in the short-term then this may be a solution worth investigating. A CVA could keep your business up and running where all other solutions may fail.