These are the common worries about CVAs that we have heard over the last 20 years or so of doing them.
''Our suppliers will not supply us!''
This is the most common worry. But YES they will supply you. They need to maintain their sales to your company, as much they don't like losing the money owed. We spend a lot of time on creditor liaison and it is very rare that a supplier will not supply. It should be noted that the new Corporate Insolvency and Governance Act 2020 restricts the ability of suppliers to rely on insolvency clauses in contracts to terminate supply further protecting the company.
It is possible that if a creditor has to be paid in full for the benefit of other creditors i.e it stops the company being unable to trade, or allows the release of goods, then it is possible that they can sit outside the CVA and so paid in full. Any such payment will have to be declared to the other creditors so it has to be justifiable in the circumstances. This is not the same as a preference where you desire to make one creditor better off than another such as an associated firm or a relative.
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.
You are trying to maximise creditors interests by doing the CVA, and therefore it's in their interests to work along with the plan.
"We will lose our customers!"
No you will not. In over 500 cases people have said this to us and we do understand why. However, in practice we have rarely seen a customer walk away from a business that is delivering its products and services; well and on time.This should be your focus. Stop fire fighting and get back to your main role in the business. This way customers will stick with your company. If you continue to focus on the fight for survival rather than maintaining good service sooner or later your performance will fall and their business may suffer. This is when you will lose your customers.
"Should we tell our customers then?"
Many people think they cannot tell their customers that they are doing a CVA or they will walk away. That is your decision and one that should be based upon knowledge of the business relationship, their requirements and any contracts. Sometimes the best answer is to tell them with us in attendance. Often this is better than a competitor telling them that you have gone bust?
Think what you would feel if a major supplier did not tell you of their problems and their plans to deal with it, but instead they hear from a local rival that you have gone into liquidation?! It is best to be upfront and honest, and explain your plans to maintain and ultimately revive the business.
"Our staff will walk out!"
Generally they will stay. If they walk out they will lose any employment rights and will not receive any redundancy, lieu of notice payments from the company or the DBEIS. Furthermore, they will not be eligible (generally) for unemployment/job seekers allowance. So we recommend being open and honest and working out a plan for and with the employees. Proper communication is vital. Some employees may lose their jobs as part of the restructure; this is painful and at times inevitable. We can work with you to to make the process as simple as possible.
''The bank will appoint an administrator!''
Again this is simply not true, as long as a cogently structured plan and a well, presented approach to the bank is used. Most banks are now much more supportive of out of court restructurings like a CVA as it avoids the usual huge asset meltdown and costs of say administration. Although the CVA cannot affect the rights of the bank or lender they are stakeholders and should be closely involved in the process.
''The HMRC will not support a CVA!''
Yes they will if it is a properly structured, well thought through plan and the company has been compliant with tax rules (i.e. filed the relevant returns) in the past (being on a time to pay deal is being compliant!). It is also advisable that the directors have filed their own tax returns on time! The HMRC agency that decided on these proposals is called the Combined Voluntary Arrangement Service. Currently, it votes in favour of c. 70% of all proposals. However, we have a >70% approval record. Please read our latest page on the HMRC and the CVA Process also our page on the Voluntary arrangement service and CVAs
"I will lose any tax losses if the company goes into a CVA"
No you won't. Even if the company's assets are transferred to another business in the form of a "hive down" then the losses can be transferred provided some certain conditions are met. For more details read our CVAs and corporation tax issues page here
''Our Regulator will step in and take over!''
Regulators can, typically, intervene and or remove a company from service provision. But that’s likely to be a HUGE headache for the regulators and they need to have a strong reason to do this and maintain control over clients, client files and ensure any replacement provider is fit for purpose. But they will do this if the provider is non-communicative and or they fear uncontrolled insolvency-led closure.
And so proper and informed communication is critical to ensure that the right message is delivered by the company and is advisors. KSA has worked with regulators across the business spectrum including Road Traffic Commissioners, the General Dental Council and the Solicitors Regulation Authority for example.
Yes any regulator can take action if it feels that services are at risk, but business as usual with and experienced, expert guidance from KSA will usually persuade the regulator that a planned solution is viable. It may lead to the need for future newcos to hive contracts to or indeed to tender for new contracts
Categories: What is a CVA or Company voluntary arrangement?
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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.