Written ByKeith Steven
Managing Director
Keith is the Managing Director of KSA Group Insolvency Practitioners which has been established for 25 years. The company has undertaken more CVA led rescues than any other firm. Read our case studies to see how.
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.
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 aren’t great then a CVA is probably not suitable.
Above all, time is against you so you must all ACT quickly.
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.
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.
BANKS?
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.
Costs:
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?
Plan C pre pack administration, or winding up of the company
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?
Call KSA Group’s DEDICATED LAWYERS LINE now on
What is a CVA? | Company Voluntary Arrangements Explained
A CVA or Company Voluntary Arrangement is a legally binding agreement with creditors allowing a proportion of debts to be paid back over time
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Notice of Intention To Appoint Administrators
A notice of intention to appoint administrators is when the company files a document to the court to outline that it intends to go into administration if a solution cannot be found to its immediate financial problems. It can be used as part of the pre-pack administration process as well as used to restructure a failing business to avoid its liquidation.
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What Does Going Into Administration Mean?
Going into administration is when a company becomes insolvent and is put under the control of Licensed Insolvency Practitioners. The directors and the secured lenders can appoint administrators through a court process in order to protect the company and their position as much as possible. Going Into Administration - A Simple Guide Administration is a very powerful process for gaining control when a company has serious cashflow problems, is insolvent and facing serious threats from creditors. The Court may appoint a licensed insolvency practitioner as administrator. This places a moratorium around the company and stops all legal actions.The administration must have a purpose and the Government encourages the use of company rescue mechanisms after administration. The 3 purposes (or objectives) of Administration Rescuing the company as a going concern. Company rescue as a going concern – this is usually a company voluntary arrangement. The company enters protective administration and is then restructured before entering into a CVA. The CVA would set out proposals for repayment of debts to secured, preferential and unsecured creditors. When the company has its CVA approved by creditors, then the administration process comes to an end after 28 days. Achieving a better result for the company's creditors This is as a whole than would be likely if the company was to be wound up (liquidation) See the differences between Administration and Liquidation. This better result is usually obtained by selling the BUSINESS as a going concern to one or more buyers. The company and the debts are “left behind”. The better result may include securing transfer or employees under TUPE, as well as selling goodwill, intellectual property and assets. Controlling and then selling property/debtors. This is called realising assets. Then the administrator makes a distribution to one or more secured or preferential creditors, in order of creditors priority. Usually the business ceases trading and employees are made redundant.Only if the first two options are deemed unattainable, can the administrator use this third option.Under the administration option, it is possible for the company and its directors (or a creditor like the bank) to apply to the court to put the company into administration through a streamlined process.However, the law requires that any finance provider (like a bank or lender), with the appropriate security, is contacted and the aims of the administration be discussed and approved. The finance provider must have a fixed and floating charge (usually under a debenture) and the charge holder will need to give permission for the process to go ahead. Five days clear notice is required. Be aware, though, that a secured lender can appoint administrators over a company without notice if it thinks its money is at risk. So communication with the secured lender is essential.
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What is Receivership?
Definition of Receivership Receivership, also known as administrative receivership, is a legally sanctioned procedure where an entity, typically a lender like a bank, appoints a receiver. The primary role of this receiver is to "receive" and liquidate the company's assets, if necessary, to repay the lender. This process is particularly beneficial to creditors as it aids in the recovery of defaulted funds, potentially preventing the company from facing liquidation. The introduction of a receivership simplifies the lender's task of securing owed funds in cases of borrower default.Receivership should not be confused with administration and a receiver can only be appointed by a holder of a qualifying floating charge created before September 2003. Changes to this procedure were brought in by The Enterprise Act 2002 which promoted company rescue and saving struggling businesses. Given the charge has to be almost 20 years old receiverships are now very rare with 2-3 only each year. Why would a company go into receivership?The company requires finance for its activities and borrows from a bank (or other secured lender). In consideration for providing the loan, the bank requires security. Normally the company will sign a debenture with a fixed and floating charge. This offers the bank security over the assets of the company. If the terms of the agreement are breached or the company does not conform to the bank's wishes, the charge holder can:Appoint investigating accountants to ascertain how secure or not the bank's debt is and determine the best route forward (not always receivership). Demand formal repayment of the loans without notice. Appoint a receiver to administer and receive the company's assets.The receiver has a duty to collect the bank's debts only,they are not generally concerned with the other unsecured creditors or shareholders' exposure.Receivership - A typical appointment Having borrowed against a business plan that has not worked, a company finds that it is suffering cashflow problems. In an effort to survive, the company reports its problems to the bank and the bank asks for more information on the problems the company faces. Struggling with the problems of firefighting, the directors find it difficult to produce the information. Often the accountancy and reporting systems are not robust and a lot of time is needed to work out where the company is going, what the depth of the problems is and the necessary reporting to the bank is delayed.As time goes by, the company's overdraft is constantly at its limit, because monies don't come in fast enough from customers. Clearly this should set alarm bells ringing at the company - it most certainly does at the bank. They call this ceiling borrowing, and take it as a sign that the directors are losing control. When this happens the bank will review the account and will typically take some or all of the following steps: What the Bank will doThe bank will ask for a reduction in its exposure. It will ask for increased security from the directors or shareholders. Usually this takes the form of personal guarantees to support the security that the company has given through the debenture. It may ask for new capital to be introduced by the shareholders. Problem is though, occasionally, this only has the effect of reducing the bank exposure as the bank takes this cash to reduce the borrowing. It can ask for a new business plan from the directors, along with regular reporting. It may ask for the company to consider receivables finance (factoring) to remove its borrowing and move to a factor. Often the bank's own factoring company. If they are still not satisfied that the directors are in control and if the bank is concerned about its exposure it will ask for investigating accountants (or reporting accountants) to look at the business. Normally this is a large firm of accountants who send an insolvency practitioner (IP) into the business to ascertain:Is the business viable? Is the company stable? Does it have a long term future if the present difficulties can be overcome? Is the bank's exposure sufficiently covered in the event of a failure? In this report the IP calculates what the assets of the business are worth on a going-concern basis and in a forced sale scenario (or closure basis). Investigating accountants often recommend that the bank sticks with the business, but that the bank should limit any further borrowing to the fully secured variety - in other words the directors must secure it personally against property for example. If the IP thinks that the company is in serious risk of failure and that the banks may lose money in that event, he/she will usually recommend to the bank that they appoint a receiver or administrator. Usually the bank (bizarrely) requires the directors to "request the bank to appoint a receiver". This is face-saving, and designed to deflect criticism from the bank to the directors.At Company Rescue, we believe that it is wrong that the insolvency practitioner that carries out the investigation could also be the receiver - We think it is essential that his/her role as investigating accountant is limited to just that. However, fortunately most banks now agree that this is not a good approach. Once they are appointed what is the receiver's role and powers?A receiver will quickly ascertain what the prospects for business are and decide whether to sell some or all of the assets, the business as a whole, or to continue to trade whilst a better deal can be achieved. Because of the rules and case law, he may wish to get rid of the assets and staff as soon as possible. (They will have to adopt employment contracts 14 days after the appointment). They may remove directors and employees without impunity. They ultimately decides the way forward and will (often) not take advice from the directors. They must pay the preferential debts (employees claims for arrears of pay and holiday pay) first from any floating charge collections. If a deal is to be done with directors the receiver must first advertise the business and its assets for sale. They must conform to the tight rules and regulations governing receivership and report to the DBEIS. A receiver must investigate the conduct of the directors of the business and file a report with the DBEIS.Disadvantages of Receivership The company is rarely saved in its existing form. Its assets will be subject to "meltdown" ( most people know that in receivership or liquidation assets are sold at a knock down price), often jobs and economic activity are lost.The directors will typically lose their employment and any monies the company is due to them, and the company may cease to trade. In addition the director's conduct is investigated.From the creditors' perspective, it is unlikely that any unsecured creditors will receive any of their money back and often they lose a valuable customer. Clearly the cost of receivership can be very high and the bank has to underwrite the receiver's costs. Advantages of Receivership The bank can take control where directors have maybe lost control. The receiver also has power to act to save the business quickly. The bank can ensure that its exposure is (at least) not increased and hopefully recover all of its money. For directors, the advantages are that it mitigates the risk of wrongful trading and may crystallise a very difficult position allowing them to get on with their lives.Preferential creditors may see their debts repaid by the receiver.Still got questions? Click here for Receivership FAQs. If there are still unanswered questions contact us by email or call 08009700539.If your business is in trouble and the relationship with the bank is breaking down, we suggest that you look carefully at the guides in this site. Receivership may be an option. Work out the viability of the business - can you trim costs? Work out the problems, set out the position and have a meeting of directors. Decide if the business can continue but needs to be restructured or if just not viable then consider administration or if the company's lenders have a debenture pre-dating 2003 then receivership. These questions and answers will give more detailed background to the Administrative Receivership technique. If you have any further general or specific questions email us or complete the contact form. Q: How does it happen? A: Receivership can happen very quickly once the bank loses faith in the directors. The best policy is to work with the bank and produce a survival plan having taken professional and expert advice. Q: But the bank can't just appoint a receiver can they? A: Yes - read the terms of the debenture closely - you will be surprised how little power you have to prevent it. In truth the bank will generally have exhausted all possible avenues to help to try to preserve the business. If the directors are manifestly not up to the job or will not listen, will not take professional advice, they will lose patience quickly. Q: Can we stop them? A: Not normally. However if you talk to an experienced turnaround practitioner they can often persuade the bank that their involvement will lead to a review of viability followed by a professional recovery plan and the bank will usually give time for this to happen (within strict financial constraints) Q: How can we avoid receivership? A: Follow the guidance on this site. Discuss the problems with your key people. What caused them and how you can get round them. Build a plan for survival. Discuss this clearly with the bank. If in doubt about the correct route speak to a turnaround practitioner or a quality insolvency practitioner who lists rescue and recovery as a specialty. Be warned most are still looking for liquidations and receiverships (undertakers)If the bank wants to put investigating accountants in; wait until you have a built workable plan and then sell this HARD - to the investigating accountant.Above all demonstrate a professional and determined approach to saving a viable business - procrastinate at your peril - the bank will not wait for that silver lining. Q: I have heard that receivership is a rescue procedure - please explain? A: Many insolvency practitioners describe selling the business or its assets to a third party out of receivership as a rescue technique. Although some part of the activity may remain I cannot understand how the loss of almost all creditors' monies, jobs and all shareholders' funds, followed by the liquidation of the company, can be described as a rescue! Q: What happens if the receiver does not get the banks money back in full? A: He/she may rely upon the banks other securities. Obviously if the directors, shareholders or even a third party has signed a personal guarantee to pay money to the bank in the event of a failure to recover its loans, then the receiver pursues this as if it were an asset of the company. The receiver may also look at the possibility of legal actions against the officers of the company or debtors or creditors to recover funds Q: What happens to my personal guarantees in receivership? A: Unless the receiver recovers all loans due the bank after his/her fees (and any payments due to preferential creditors) then your PG will crystallise. In other words the receiver may seek to recover money from you. Q: What happens to the employees? A: This is a complex question that cannot be answered without a great deal of information. If the business is sold in a reasonable time then their employment rights can be continued with the new owners (under TUPE). If the receiver makes them redundant straight away they can claim for payments from the government (subject to a maximum amount). Again this is a complex question - email us if you want more detail.Please call us on 020 7887 2667 (London) or 08009700539 to talk to an expert turnaround advisor if you would like to talk through your company's options.
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