Sadly, not every company formed becomes a roaring success and some are doomed to insolvency and liquidation. This occurs where the company is no longer viable, is unable to meet all of its financial obligations and is continuing to lose money. One option at this point, under UK Insolvency law is for the Directors of the company to enter what is known as a company voluntary agreement, or CVA. A CVA allows a company with debt problems or which is insolvent, to reach an agreement with its creditors, unforced, relating to repay all or part of its debts over a mutually agreed period of time. All Directors of the company must be in agreement, as should the appointed company liquidator, or the legal administrators.
Implementation of a CVA
A licensed Insolvency practitioner must be appointed, who will prepare a draft proposal for the creditors, who will then meet to see if the proposal is acceptable.
A successful company voluntary agreement requires 75% of creditors, by debt value, to agree. Company Directors become bound to the proposals terms and creditors are unable to take further legal action, as long as the terms are adhered to. Creditors should be given a minimum of 14 days’ notice of a CVA meeting, though do not have to physically attend and can vote by proxy.
Contents of a CVA proposal
The proposal itself should contain all the relevant information for creditors to consider, including details on how the financial problems occurred, Up to date information on the company’s current financial position, including assets and liabilities, with projections of what the company can afford to pay on a monthly basis and the predicted duration of time needed to complete the process. Directors must review it and make any necessary changes. Once agreed upon, it will be sent to all shareholders and creditors.
The benefits of entering into a CVA
When a CVA has been agreed, Directors retain control of the business, though have a legal duty to act in a manner that prioritises the interests of their creditors. It can rapidly cut costs as property lease obligations can be terminated, other leases, employees and supply contracts can be terminated, while preventing winding up orders and tax issues. It is generally a good deal for creditors, who are likely to see at least some, if not all of their money back. At the end of the agreement, the CVA will finish at its agreed upon time, if all payments promised have been made, and the proposals conditions have been met. Outstanding debt at this point can be written off, or the CVA possibly can be extended. In the UK, only a licensed Insolvency Practitioner can be appointed to formal insolvency procedures. They are licensed to provide advice and to undertake an appointment for all insolvency procedures and are regulated by the Insolvency Act of 1986.
If your company is losing money and the list of outstanding creditors are growing, with no improvement in the situation immediately foreseeable, it is wise to discuss the matter with your local business recovery specialists at the earliest possible point, to ensure the most options and best outcome for the Company Directors, Shareholders and Creditors alike.