Derek Cooper

Company Voluntary Arrangement solves Business debt problems

Company Voluntary Arrangement solves Business debt problems

In the economic downturn a number of businesses are struggling financially. If it looks like your business is unable to pay its bills and is therefore facing insolvency, particularly where there is a large debt burden, a company voluntary arrangement (CVA) may be a good solution to turnaround your business.

A number of companies are finding trading conditions very tough in the current economic climate with cash flow problems and mounting pressure from creditors. If it looks like you are facing insolvency, particularly where there is a large debt burden, a company voluntary arrangement (CVA) may be a good solution to turnaround your business.

Historically a number of creditors were sceptical or resistant to CVA's due to having to write off debt, but recent publicity of well known companies including JJB Sports plc, Focus DIY plc and Black Leisure has made them more receptive to consider the proposal. HMRC debts such as PAYE and VAT can also be included in this solution.

The legal process of a Company Voluntary Arrangement is used to settle the business debts with the creditors of the company. The creditors agree to accept reduced payments based on what the business can afford to pay over a fixed period, normally five years. All creditors get chance to vote on the arrangement, but if 75% by value agree then all creditors are bound to the legal arrangement. When the period is over, the creditors write off any outstanding debt and the business is able to continue trading debt free. Frequently over 50% of the debt is written off.

Advantages for your Business

• The business can continue to trade.
• The structure of the company and employees can be retained.
• Creditors cannot take other legal action against you.
• Upfront capital investment is not needed (as is the case with a Pre-Pack Administration).
• A chunk of the business debt is written off.

Advantages for the Creditors

Why would any creditor want to agree to a solution where they have to write off a significant portion of the debt!

• Creditors get a far better return than if the company was liquidated where they are likely to get little or no return.
• Suppliers can maintain ongoing business with the company. In these troubled times a supplier will be reluctant to lose a customer.

Once a Company Voluntary Arrangement is agreed, then it is far from plain sailing. It is important that you do not allow things to go the same way again once the debt is reduced to manageable levels and you will need to focus on ensuring ongoing success of the business. Very often some tough decisions will be required to be made, and new ideas injected in order for the CVA to be a long term success.

Clearly a Company Voluntary Arrangement is one of the Business Recovery and rescue tools that can give breathing space to get a business back on a sound footing.

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