We are a firm of very worried solicitors. Our legal practice is a company or LLP. We are under growing pressure from all sides. How can you help us solve these problems, restructure and survive?
There are three options to deal with severe cashflow problems, this page looks at Plan B company voluntary arrangements (CVA)
A CVA could be the answer to your company's problems and could even help protect you personally from your creditors. But it is a risky approach and possibly very damaging to your company credit rating. A hive down may resolve this credit rating issue, ask us for details.
A CVA is a powerful insolvency tool that will ringfence your company creditors (that's all your unsecured but typically not the secured debts) and it can quickly take away the creditor pressure. It is acceptable to the SRA and in our experience the SRA will want to be informed but will not intervene.
Many law firms have significant tax and trade debts. By ring fencing tax / trade debts and repaying them in full or in part over say 12-60 months this can have a major impact on cashflow allowing the company to survive immediate winding up threats, reduce fixed costs and people costs, it will usually be acceptable to the SRA and leaves the directors or designated members of a LLP in CONTROL of their business.
If the directors believe in the fundamental viability of the practice and are determined to fight for the business then the CVA is a powerful rescue mechanism that is acceptable to the SRA. But most people are not aware that it can also be a powerful tool or framework for the restructuring of the business.
Property leases and employment contracts can be terminated, costs cut and the business re-shaped to aid survival. This can be tough to drive through without the CVA approach. It can also be an emotional challenge for the directors to have to drive, so bringing in turnaround and insolvency experts is vital.
KSA Group has turned around hundreds of companies including law firms. We can see the wood from the trees and guide your restructuring programme.
It must be understood that this mechanism is not easy; the directors must work hard on a plan to change the business, cut costs and prove they can make the company viable. Above all the directors need to be determined and united to make this technique work.
So what is a Company voluntary arrangement (CVA)? See our experts guide to company voluntary arrangements here for a full description, case studies, flowcharts and case law.
The best way to think of a CVA is as a deal between the debtor (the company that owes the money) and the creditors; the people or businesses to whom the money is owed.
Where the debtor cannot pay off its debts on time or the company is insolvent (for a definition of insolvency click the insolvent) or if your company is under huge pressure then the CVA may be an appropriate solution.
Making a payment on a regular periodic basis the company can bring together all of its unsecured debt problems (except where the creditor has security such as a mortgage over property) and get on with their business and their lives.
Who should use a CVA?
It is imperative that the CVA is only used where the LLP or company is viable or where it has disposable assets that can be turned readily into money in the short to medium term. Using the CVA can allow time to sell such assets for better value than a liquidator or administrator can obtain.
If the business isn't viable it should be wound up (see Plan C) as soon as possible and if personal guarantees are a problem, this may lead to IVA or personal bankruptcy for the directors.
If the company is behind with PAYE, VAT and trade creditors then action may be taken by one or more of these creditors. If they petition to wind up the company, the board starts to lose options and lose control.
If however the business has never made profit, sales are not rising to the level where overheads start and known prospects arent great then a CVA is probably not suitable.
Above all, time is against you so you must all ACT quickly.
Writing the CVA proposal
The law envisages that the debtor(s) will write the proposal and then ask an insolvency practitioner to act for the company. Of course the process is complicated and you have a business to run. Therefore it is probably best to use experienced, pragmatic and respected Turnaround practitioners such as KSA Group to write the proposal. Regardless of whom you use the following points should be remembered:
1. Base it on sensible cashflows, sales and costs. Don't guess, don't expect large increases in fees.
2. Expect that things in the first year will be a difficult and that fees may indeed fall.
3. As a result expect to suffer in the first year and do not promise to make large payments in the first year.
4. Don't promise too much but as above make sure it repayments are affordable.
CVA Proposal contents
The proposal should include a description of why the business has failed and why it is insolvent. It should also detail what the structure of the CVA deal is and how the creditors are going to be repaid. To help the creditors decide whether to accept the CVA it must contain what is called a statement of affairs. Or SOFA for short.
A SOFA paints a picture of your financial position and demonstrates that the company is insolvent. It will also show what would happen if the company was wound up and went into liquidation and what the outcome would be if the CVA were approved and successful. Of course the risk of SRA intervention means that liquidation may generate NIL return for creditors. SO CVA is a better choice, whilst perhaps Hobsons choice.
The document will describe how long the deal is for. Typically most CVAs last between three and five years. And the document will describe how much the company will pay from the business in the months and years ahead to its creditors.
After the document has been completed and the nominee (Nominated Supervisor) has reported it can be filed at court. The purposes of this are to ensure that the document that is filed at court is the same document that is circulated to all creditors.
Occasionally the bank is unsecured in these situations. It may not have a valid security over debtors for example. If so then the bank would be compromised by the CVA. We are currently negotiating with several banks to reduce debt where the bank does have security, but the company is unable to service that debt.
Most often though the bank is secured and can appoint its own administrator or receiver. Care must be taken to keep the bank appraised and detailed forecasts provided to show whether the company can operate within the set facilities.
Solutions include loan payment holidays, occasionally debt write down, long term debt conversion from overdraft to long term loans. Re-banking with more appropriate facilities and debt write off.
CVAs are complex schemes to put together and care must be taken to consider all stakeholders objectives, carefully set out a plan and ensure buy in from creditors.
Our fees usually come from cashflow savings that we can create for your partnership as part of this process. We often take a fee over several weeks and add a success fee if agreed targets are achieved. All fees are quoted in writing.
What now? If your business has cashflow problems you must act or the creditors will, sooner or later act aggressively against you.
What if neither Plan A or Plan B is suitable?
Of course acquisition by another firm is a possibility too. Will this acquiror pick up all of the liabilities of your firm? Perhaps pre-packaged administration could preserve the business and employment?
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Worried about poor cashflow? Covid-19?, How to pay wages on pay day? For expert advice on a range of issues download our free Ultimate Guide For Worried Directors today. Or just call us on 0800 9700539
Please note that the guide was mostly written pre Covid-19 and there have been some changes to insolvency legislation that limits creditors actions and relaxes rules regarding wrongful trading. A new 20 day moratorium for distressed businesses has also been introduced.