When a company runs into difficulties paying its debts, its relationship with creditors can go down one of two routes.
On the one hand, things can become hostile and combative. Disgruntled at not receiving their money as agreed, creditors can choose to take enforcement action against a firm to force it to pay its debts, up to and including petitioning for a winding-up order through the courts.
The message from creditors who choose this path is simple – they want the money owed to them come what may, even if it means liquidating the debtor and stripping its assets. And to be fair, sometimes creditors are left with little choice.
The alternative route involves a business reaching out to creditors and coming to an arrangement on how its liabilities are to be handled. This will typically involve extending the repayment terms, with guarantees given to creditors based on forecasts of future profits.
Rather than hostile, this approach is collaborative and consensual, aiming to achieve a satisfactory outcome for all parties. Over the past decade or so, the emphasis in dealing with company insolvency has shifted very much in this direction. After all, limiting the number of companies that end up going to the wall is in everyone’s best interests.
It’s out of this desire to resolve more insolvencies through dialogue that Company Voluntary Arrangements (CVAs) emerged. CVAs are a formal process for reaching an agreement on debts between debtors and creditors governed by rules set out by the Insolvency Service. They are administered by a licensed insolvency practitioner and usually set out a restructured (i.e. lowered) repayment schedule over a period or 36 to 60 months.
CVAs may be suggested by an administrator or even a liquidator as a means of rescuing an insolvent company if it is believed the business can return to profitability if its debt burden is reduced. But CVAs can also be proposed by company directors when a business is facing insolvency as an alternative to entering administration or having a winding up order served.
Here are the steps directors need to take to get a CVA agreed.
Contact a licensed insolvency practitioner
CVAs have to be administered by a licensed insolvency practitioner. So your first step in proposing an arrangement with your creditors is to contact one – such as JT Maxwell, for example.
An insolvency practitioner plays two roles during the CVA process. First, they are responsible for negotiating the proposals with creditors, at which point they are known as the nominee. If and when the arrangement is agreed, the insolvency practitioner takes charge of overseeing its implementation. In this role they are known as the supervisor, and they remain involved for the duration of the agreed arrangement period.
Set out your company’s position
Having contacted an insolvency practitioner, the next step is to explain why you are seeking a CVA. This will include detailing your company’s financial situation, covering whatever problems you are experiencing with cash flow/paying bills. You must also outline why you believe a CVA is the right step forward, which includes being able to demonstrate why you think the business will remain viable if debts are restructured.
It will be up to the insolvency practitioner to decide whether they agree that this is the case. If they don’t, they may suggest an alternative course of action such as entering administration. If they do agree a CVA is workable, they will work on putting together a proposal.
Review the insolvency practitioner’s proposal at board level
Before anything else can happen, your board must approve the insolvency practitioner’s proposals. Only after that has happened will they be formally appointed as nominee.
Nominee takes charge of negotiating with creditors and drafting CVA document
The good news is that once you have appointed a nominee, you can get on with running your business. They take charge of managing the whole pre-agreement process, including holding meetings with and negotiating with creditors, drafting and redrafting formal CVA proposals, and also registering a final draft along with a report of the negotiations with the courts. This puts the CVA on a legal footing.
Creditors and shareholders meeting called to approve the CVA
Final confirmation of the CVA takes place at a creditors and shareholders meeting organised by the nominee. It must secure approval from 75% of creditors and 50% of shareholders to be implemented.
As licensed insolvency practitioners, here at JT Maxwell we can help you put your business on a sounder financial footing by negotiating a CVA with your creditors.
Get in touch to find out more about how we can help.