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Company Voluntary Arrangements (CVA) - Worries and Mistruths!

3rd March, 2022
Keith Steven

Written ByKeith Steven

Managing Director


07879 555349

Keith is the author of the content on this comprehensive rescue, turnaround and insolvency website. He has expert knowledge on the company voluntary arrangement (CVA) mechanism

Keith Steven
  • ”Our suppliers will not supply us!”
  • “We will lose our customers!”
  • “Should we tell our customers then?”
  • “Our staff will walk out!”
  • ”The bank will appoint an administrator!”
  • ”The HMRC will not support a CVA!”
  • “I will lose any tax losses if the company goes into a CVA”
  • ”Our Regulator will step in and take over!”

These are the common worries about CVAs that we have heard over the last 25 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 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

Still got questions? Then click here for CVA FAQs or here for a flowchart.  Alternatively give our team of advisors a call on 0800 9700539 now, or contact us by email: keiths@ksagroup.co.uk

Man with umbrella

What Is A Winding Up Petition By HMRC or Other Creditor

A winding up petition is a legal notice put forward to the court by a creditor. The creditor petitions to the court if they are owed more than £750 and it has not been paid for more than 21 days. The application, in effect, asks the court to liquidate the company as they believe the company is insolvent.

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What Is A Winding Up Petition By HMRC or Other Creditor
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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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Notice of Intention To Appoint Administrators
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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. (Note: this purpose is to rescue the Company as opposed to rescuing the business undertaken by the Company.)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 Does Going Into Administration Mean?

What is Receivership?

in What is …? What is receivership?

Understanding 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. 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.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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What is Receivership?

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