When meeting directors they usually like the option of a Company Voluntary Arrangement , but they do have the obvious worries about future trading.
Common ideas include “we want a CVA to restructure the business, but we are worried that our intellectual property would be put at risk”. Or “if we do a CVA, we may be unable to tender for new contracts”. Or “why would our client continue to work with a company in a CVA”?
So, what are possible solutions to these problems? Here, at KSA Group, we are pragmatic experts who will always try to help you find solutions. By using a CVA we can restructure viable but distressed companies. Sometimes this requires solving complex problems that can mean a standalone CVA is not sufficient. In appropriate circumstances we have used the following methods to address such complex scenarios.
What is a Hive Up?
Hive essentially means “to move”. An asset, or the whole business can be ‘hived’ up to a currently existing or newly formed GROUP company, we call this “groupco”.
This can be a really clean vehicle that is either newly incorporated or a company that already exists in the director’s or group portfolio. It will often have a clean balance sheet, no existing liabilities, but of course, a low credit rating, often 40-50 out of 100 or so. But of course, this is better than having no rating, post CVA.
Moving assets within a group is not usually a problem for taxation (though we do stress that we are not tax experts and you should take your own advice from tax experts).
OR groupco can acquire the business of oldco through a business asset sale. The trading business can then make payments for the purchase of the assets to oldco, which in turn uses the receipts as the contributions into a company voluntary arrangement .
Alternatively, a newly formed company can acquire the shares of the trading company (“oldco”) which is going into a CVA, for nil or low value as the equity of the existing oldco company is often worthless.
Usually before deciding on hive up, hive out or hive down, we recommend getting an independent valuer to provide a business asset valuation.
Each situation needs careful assessment to decide the best method – call us to arrange a meeting with one of our KSA directors or regional managers to find out more.
What is a Hive Down?
The board of oldco decides to sell some or all of the assets to its newly incorporated subsidiary company, called “bottomco” and the consideration (price) for this transfer is the shares in bottomco, or a cash payment can be made. This is effectively a swap of value for shares.
Perhaps bottomco could raise new funds to achieve this. The providers of such funds must consider taking appropriate security and or the bank debt in oldco can be novated down to bottomco.
Topco is now an insolvent company, with modest or zero assets other than the shares held in bottomco which are in effect not worth anything much. It enters into the CVA – company voluntary arrangement – to repay its unsecured creditors say 30p in £1 over 5 years, or 75p in £1 in 3 months. Bottomco may then pay this to Topco in consideration for the release of the shares.
After the CVA ends, Topco could be wound up or left as a holding company for example. The people involved may buy the shares from the liquidator after a valuation from an independent party.
This process avoids what is known as “transaction at an undervalue” which is a possible breach of s238 Insolvency Act 1986.
As ever this is only a general guide, we cannot cover every scenario, so if you have a question or problem talk to us soon.
Keith Steven – Managing Director KSA Group Ltd
Call 07974 086779 or 0800 9700539 today