These questions and answers will give a more detailed background to the technique. If you have any further general or specific questions email us by clicking here
These questions are the ones we hear most regularly - remember your situation will be unique to you, so call us on FREE phone 08009700539.
Q: If we propose a CVA what will the banks reaction be?
A: In our experience if the bank is presented with a vague "we might do a CVA" approach they will become very worried, very quickly. As you will recall from the CVA guide page, preparing the CVA is the job of the directors and their advisors. A properly structured and pragmatic deal that is based on reasonable assumptions will be much more acceptable to the bank. In other words, prepare the draft CVA with your turnaround practitioner and try to build an outline for dealing with the secured creditors. Then approach the bank. The local branch manager must pass the proposal to his/her debt recovery unit and cannot (usually) affect the outcome of the deal - if he/she understands the business well and is friendly he/she will probably support the deal.
Remember, the bank is (usually) secured, therefore the CVA cannot bind the bank in legally, but conversion of the overdraft into a longer term loan may give the bank more comfort that the company is keen to repay the debts. Talk to a turnaround practitioner who is used to dealing with banks.
Remember banks are in the business of financing and helping customers not knocking them over unnecessarily!
Q: Someone told me that if we do a CVA the company has to pay back 100p in the 1 or the tax people will reject the proposal, is that correct?
A: NO! The amount the company pays back should always be based upon affordability, not some arbitrary number. We always work out a 5 year programme with supporting and highly detailed forecasts. Then the result is a better structured longer lasting CVA.
The HMRC people will be happier to support that plan than a half baked scheme that takes the total unsecured and tax debt and divides it by 24 months to get a simple 100% repayment. This method is doomed to failure!
Under the law there is NO minimum payment or dividend, as it is known. The law simply lays out a method for offering a deal to the company's creditors. In our CVA deals the average is under 40p in 1 repayment 97% of those deals have been approved.
Q: I don't think that my creditors will continue to supply me if I go into a CVA?
A: This is the most common worry. But YES they will supply you. They need to maintain their sales to your company, as much as they don't like losing the money owed. We spend a lot of time on creditor liaison. By carefully explaining what the company is doing, how it will be in their best interests and asking them to work with the company and ourselves, we ensure that creditors are kept informed and on side. Don't expect any credit terms or any favours. But being honest and open with them pays dividends in the long run. In the end not paying your suppliers on time and having them issue threats is even more detrimental to your business. If we think you can pay them back completely over time then we can always look at a time to pay arrangement whereby we do a deal to pay back all of the debt over an extended period. Also, do not forget that a CVA can be 100p in the £1 and that is binding on all other creditors.
Q: If we propose a CVA what will HMRC do?
A: HMRC has a duty to consider the deal. The normal process is for the turnaround practitioner to call HMRC and say a CVA is being prepared. The collector or debt recovery unit will then pass the file to the central voluntary arrangement department in Worthing. They will consider the document very carefully and vote accordingly. They will not (usually) collect any tax and NIC between notification and the creditors meeting.
Q: Should I tell my best customers?
A: There is a view (which we share) that the key trading "partners" of our business should be aware of what is going on. I think a controlled approach (once the deal is proposed) to key customers will be much more beneficial than allowing them to hear "through the grapevine".
Q: We are about to sign a new contract with a very important customer - if we propose a CVA what should we do about them?
A: Often clients think that the new contract is dependent upon the quality of your product and or service, but the customer will be checking the company's ability to fund itself and to be in business some months or even years down the line. Again a concerted and controlled approach (typically led by the turnaround practitioner) will often generate positive results. Talk to your advisors about this and decide on appropriate action.
Q: What will my creditors think?
A: Of course they will be disappointed - think what your reaction is when a customer fails, but with the correct approach they will understand. Perhaps they realise that you have been under pressure for a while and that by proposing a CVA you are trying very hard to protect the business. By proposing a CVA you are demonstrating that you are trying to maximise creditors interests so it can often be viewed positively
Q: Should I involve my employees will they walk out?
A: It is our opinion that you must involve them when the time is right, they're the people who are going to help deliver management's plans.
A: Not unless they want to suffer financial hardship. Voluntarily leaving will negate their chances of benefits. If they have a new job to go to there is little however to be done to stop disgruntled employees leaving. But if the employees can be involved as part of the recovery - perhaps by offering a share package as part of the long term strategy, the key employees can often be retained.
Q: A Bailiff or Sheriff has a controlled goods order, if we propose a CVA what should I do about that?
A: It is all about communication. We would advise talking to them when the time is right, gently pointing out that the assets actually are charged to the bank (or other secured creditor) and that the company is seeking to maximise all creditors interests by proposing a CVA. They will listen if talked to in a mature way. Payment of their outstanding costs can often remove the pressure whilst not actually paying the petitioning creditors debts.
Q: The business is viable but why do a CVA - why not just "dump it"?
A: If you are determined to liquidate and start again perhaps even the strong economic arguments against liquidation are above your head. Remember the goodwill, tax losses; costs of liquidation, increase in creditors claims and reduction in value of assets are powerful arguments to preserve a viable company. You also have a legal and moral responsibility to maximise your creditors interests.
The risks of dumping it to avoid paying your creditors include - disqualification as a company director, being made personally liable under the Companies, Insolvency and Criminal Justice Acts, and being pursued for any misfeasance or wrongful trading. Of course the risks are small but you should carefully consider and weigh them up.
Q: What happens to my Personal Guarantees if we propose a CVA?
A: They are guarantees that cannot be removed unless and until the debt is paid off. The longer term repayment to secured creditors should be considered as part of the overall restructuring. Once the debt is cleared there is no reason why PGs cannot be removed.
Q: We have big tax losses - won't we lose them in a CVA?
Q: Can the company be protected from an aggressive creditor while we propose the CVA?
A: Yes there are two methods, one relies on case law and the other on the new Insolvency Act 2000. For a full explanation of how the new Acts moratorium process works talk to a turnaround practitioner or an insolvency practitioner. In case law, providing a creditor has less than 25% of the overall debts of the company then they can be required to consider the proposal even when a winding up petition is issued. (Dollar Land Feltham & Ors)
Q: Can we continue to trade while we propose the CVA?
A: Provided it maximises creditors interests, it is essential to keep trading.
Q: What happens to the HMRC payments?
A: See answers to HMRC questions above. You will need to continue paying PAYE and VAT going forward as you will need to show that the business is viable. It also helps goodwill and increases the likelihood of them voting in favour of the proposal.
Q: Is it expensive? How do we pay the cost of a CVA?
A: In comparison to other forms of insolvency, no it is not expensive. Individual circumstances determine the costs; but do speak to a turnaround practitioner or an insolvency practitioner about this area. Because payments to the Crown and other non essential creditors are suspended whilst putting the deal together, cash flow often improves allowing payment. However, many IPs and practitioners will consider spreading the cost of their work to match cash flow ability.
Worried about poor cashflow? How to win new work? 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 written pre Covid-19 and there are some likely changes to insolvency rules regarding wrongful trading. Please see this page here.