Are You Suffering From Business Debt? A CVA May Help

by Mike Field

saving a piggy bank from going underwaterA Company Voluntary Arrangement (CVA) is in simple terms is a solution to prevent company liquidation. It is an arrangement between your company and its creditors allowing the business to pay back an affordable proportion of the debts to creditors over a period of up to 5 years, with the unpaid balance being written off including any unaffordable VAT and PAYE arrears.

CVAs are ideal for viable but insolvent businesses that have the potential to turnaround and become successful. They are especially valuable when your business has been issued a winding up petition, but you will need to act quickly to start the CVA process. Even with all of these benefits in mind there are still many negative myths and untruths circulating about the success of a CVA, so I thought it was important to separate fact from fiction.

“Creditors think CVAs don’t work”

It is true that a badly thought through a CVA, or a CVA for companies that are fundamentally flawed don’t work. However, if the time is taken to assess the viability of the company, and creditors are presented with a sensibly drafted proposal, a CVA will work and is often a much better outcome for creditors.

In my experience, in circumstances where a well prepared proposal is agreed by creditors for a genuinely viable business, the majority do succeed and creditors receive a better outcome than if the company had ceased trading and been placed into liquidation.

“Our creditors will not continue to supply us”

Actually turn that statement around and ask ‘why wouldn’t they?’. Like you, suppliers need customers to maintain their level of turnover and more now than ever the customer is king.  A well drafted CVA proposal will explain to them why the company is proposing a CVA, what they are likely to receive from the arrangement and how the business is able to make profits in the future. Importantly they will see that they can benefit by being one of its suppliers.

It is important to engage with key suppliers at an early stage, communication makes a massive difference to the relationship. Some suppliers may not offer you the credit terms that you enjoyed previously, but once the trust is built back up, our experience is that the credit offered increases. In the meantime, if you have frozen payment of the old date, you will have access to cash from your customers to pay your suppliers for new goods on a pro forma basis.

Don’t lose sight of the fact that the suppliers need the company to survive, to ensure the CVA delivers the return back to them as creditors and therefore it is in their interests to support the ongoing business.

“HMRC do not like voluntary arrangements”

HMRC consider CVA proposals centrally in a specialist unit and they do have a standard set of requirements that they expect to see in the proposals, but they do also consider the proposal on its merits. As long as the proposal can demonstrate that the business is viable going forward and offers a significantly better return to creditors than in liquidation they are likely to support the proposal.

There are two additional key factors to consider in relation to HMRC’s support.

  1. Is the company up to date with its compliance, ie filing its tax returns, and will it continue to do so for the life of the CVA?
  2. Will the company keep up to date with its future tax payments?

As long as the company does not fall foul of these two points above and complies with the terms of the CVA, HMRC typically support voluntary arrangements.

“The bank will call in their debt”

It is important that as part of a joint approach to the CVA that you discuss your plans and CVA proposals with the bank and any other key stakeholders, at an early stage, especially if the bank has security over the assets of the company for its lending.

Banks generally are supportive of (well thought through) CVAs for businesses that can demonstrate that they are viable. It keeps the value of the business as a going concern and therefore the value of the assets over which they may have security, whereas they could be looking at a shortfall in a liquidation situation.

It also avoids the media attention on the bank if they were to appoint administrators to protect their position where administration is likely to be the alternative route if the CVA is not to be accepted by them or creditors.

One very important consideration as regards the bank and CVAs is that a CVA can prevent personal guarantees being called upon, thereby preventing the guarantors from being required to repay a potentially significant company debt out of personal assets.

“Our customers will not support us”

It is important to carry out an assessment of the likely reaction from customers when preparing the CVA proposals as this is an important factor in the viability of a CVA.

In many cases customers will simply not be aware that the company is even in a voluntary arrangement as the CVA is an arrangement solely between the company and its creditors.

Where they are aware, provided that they are reassured it is unlikely they will want the hassle of finding new suppliers. If they trust you and you have not let them down, why would they now consider you to be more of a risk, now that you have a formal plan in place to deal with historic debts and more importantly, why are you more of a risk than your competitors who have not restructured their debts?

They also may not be able to re-source quickly, so actually the power may be in your hands and you may have more of a hold over them than you think.

One question I am often asked is “should we tell our customers?” and there is no black or white answer to the question, it depends on the circumstances. Some customers appreciate being kept informed and continue to support the business, others have no real interest. It is dependent on the type of business and the relationship you have with your customers. If you are in doubt it is usually simplest to tackle the issue head on and I have not found this to be a particular problem.

Rather than fire fighting irate creditor calls, the CVA will allow you time to focus on developing existing and new customer relationships and you often find that your business is now actually winning more new work as you have time to concentrate on taking the business forward.

“Our staff will leave”

We very rarely hear of staff resigning when they find out what is happening. For a start, they would lose all potential redundancy entitlements and employee benefits. They may not easily be able to find alternative employment and would be unlikely to be eligible for government benefits such as job seekers allowance.

My advice is to plan to meet with the staff as part of the process, to explain what is happening and how it impacts them. The key is usually to be open an honest. Once the position is explained to them, they are usually supportive and helpful.

“I have to pay 100p in the £ to my creditors”

This is simply not the case. The business should offer what it can realistically afford to contribute to creditors from its future profits. If this is more than creditors are likely to receive in a liquidation of the company, creditors are likely to support the proposal.

Importantly, there is no minimum time frame for a CVA, but the length is generally limited to no more than five years and I would usually press for no more than three. If the contributions proposed amount to, say, 40p in the £ over that period then that is the amount creditors receive. The remainder of the debt, so 60% in this example, is written off.

Don’t rely on the advice from the man in the pub, talk to a trusted expert for the facts.

CVAs do work and creditors do support them if the business is viable and the proposals themselves are sensible.

Contrary to the myths, my experience is that there are many advantages to CVAs, and they do work and creditors do support them if the business is viable and the proposals themselves are sensible.

###

Mike is a business recovery specialist. He started work in the Business Recovery profession in 1987 and has continued to pursue an ethos of working with distressed businesses to help them overcome their financial problems. As an Associate of Cashsolv, he offers advice and support to overcome cash flow problems and identify possible underlying problems that can be addressed to ensure a positive future for your business.

Website: www.cashsolv.co.uk