How Company Voluntary Arrangement Becomes Redundant Due to Change in Insolvency Laws

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How Company Voluntary Arrangement Becomes
Redundant Due to Change in Insolvency Laws
After figures surrounding insolvency were
released last year, it looks as though the
reintroduction of Crown Preference is on the
horizon. This reintroduction could wreak serious
damage on company rescues and make the companys
voluntary arrangement completely redundant. This
is going to be discussed in more detail
throughout the below article.
What Is a Companys Voluntary Arrangement
(CVA)? To begin with, lets look into what a
Company Voluntary Arrangement (otherwise known as
a CVA) actually is. A CVA is a legally binding
agreement between a business and that businesss
creditors, which allows a certain proportion of
debts to be paid back over an agreed period of
time. In order for a CVA to be agreed then at
least 75 of the creditors need to be in support
of the terms of the agreement. Once a CVA has
been agreed then all of the unsecured creditors
will be bound by the arrangement. The company has
the authority to keep trading as normal and the
director of the company remains in control as
well, which means it is more likely a company
will be rescued from the brink of administration.
The CVA will continue to be monitored by a
supervisor who needs to be a licensed insolvency
practitioner. There is no time limit on how long
or short these arrangements can be however, they
usually last between 3 and 5 years. This is one
of the best rescue tools which is available to a
company because it provides a viable way forward
but also doesnt place too much pressure on the
business to pay off its debt. The amount and the
timeline agreed is done so, so that the business
can steadily clear its debts, whilst continuing
trading and trying to be profitable.
What Are the Main Advantages of a CVA?
In order to better understand why changes in the
law impacting CVAs are a bad thing, it is worth
discussing some of the main advantages of a CVA.
Some of the biggest benefits that organisations
feel following a CVA being agreed upon
include A companys voluntary arrangement is
effective when it comes to quickly improving an
organisations cash flow. When a business enters
into a CVA, they are alleviating pressure from
the likes of HMRC, VAT and PAYE, whilst the
arrangement is being prepared. By using a CVA,
companies are able to stop the threat of a
winding up petition. Costs can be cut rapidly in
a CVA as expensive managers can be quickly made
redundant. Companies also have the opportunity to
terminate employment, compliance/payment
obligations under various leases, onerous supply
contracts and essentially everything with a NIL
CASH COST. Companies can terminate any property
lease obligations as well so that they can vacate
premises with NIL CASH COST, stopping themselves
from getting into more debt by adding rent prices
on top of ongoing business obligations.
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All of the money which is owed to various
creditors can be bundled up into one monthly
payment that is sent to the supervisor, this is
then distributed to the necessary
parties. Employees can be removed with no
redundancy payments in lieu of notice costs. If
there are any onerous customer/supplier contracts
in place then these can be terminated. The
relevant board members and shareholders remain in
control of the company and can dictate how it is
run. A CVA costs a lot less than
administration. A CVA isnt publicly announced in
the same way that an administration is. Your
customers do not need to know that your company
is in a CVA. The Return of Crown Preference and
Its Impact on CVAs Despite the clear benefits of
CVAs, a decision made by the HM Treasury back in
2018 has essentially rendered them impossible. In
the budget which was announced back in 2018, it
was revealed that certain tax debts are going to
be moved to preferential status (which is more
commonly known as Crown Preference). The
governments own calculations have suggested that
this small shift is going to increase the
recovery to the Treasury by 185 million per
year. That being said, this small change has a
massive impact on CVAs. Essentially, it means
that if a hospitality company, for instance, is
interested in proposing a CVA, then said the
proposal is going to need to include the payment
in full of all of its employees NICs, as well as
the VAT before unsecured creditors are able to
receive anything. The only way in which these
circumstances would not apply would be if HMRC
votes to receive less than full payment of the
sums, which currently, it is completely unwilling
to do. With creditors waiting longer to start
being paid back, they are less likely to agree to
a CVA initially being put in place (as previously
discussed, 75 of creditors must agree to the
terms). If this is the case then the CVA is
simply made redundant as businesses will not be
able to get their creditors to agree to it. A CVA
is an effective way for organisations
experiencing financial hardships to continue
trading and potentially rescue their own
business, if this option is fully taken away then
the number of insolvencies, administrations and
liquidations is only going to increase. Are You
Interested in Exploring the Option of a Company
Voluntary Arrangement? If your business is
currently going through a hard time then you
might be interested in looking into getting a
CVA. Naturally, because of the above, you might
not know if this is a feasible option. In order
to find out more, you should consider reaching
out to Leading UK. Here, our team of experts will
be able to sit down with your business in order
to better discuss what you do, what your current
situation is and what the best way forward is. If
you have any questions or require any further
information then do not hesitate to get in touch.
By Viv1 August 28th, 2023 Liquidation
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