Archive for August, 2013

20
Aug
13

The Company Voluntary Arrangement

Although liquidating and buying back the assets can be a simple way of dealing with an insolvent company, it is not always the best solution for the directors or shareholders.

A recent case involving a company with assets worth £20,000 on liquidation and liabilities of £180,000 (with £92,000 owed to the bank) indicated that liquidating and buying back the assets would seem the obvious solution. However, doing so would have serious consequences for the directors who had given personal guarantees to the bank. The directors, who were in their mid to late 50s, had no funds to either settle their guarantees or buy back the assets and so faced losing their houses and well as their income were the company to fail.

Having discussed the options available, a Company Voluntary Arrangement (CVA) was the preferred solution to enable the company to continue trading and service the banks debt which was secured by a debenture. However, for a CVA to work the company has to be profitable and be able to make income payments. Working with the company’s accountant, a plan was put in place to rationalise the business and return it to profitability.

Support of the bank was vital so an outline of the CVA proposal was put forward. The bank indicated their support and so the CVA proposal was developed further. As the proposal was being finalised the directors were advised to speak to the main trade creditors. Although these meetings were uncomfortable for the directors, the creditors involved appreciated the fact that the directors had taken the trouble to see them and this helped gain their support.  At the formal meeting of creditors the CVA was approved by all the creditors who voted.

The CVA was structured so the company would pay income payments for a period of five years based on what it could afford to pay, having taking into account the servicing of the bank debt.

In fact during this five year period the company’s loans and overdraft will be repaid in full so that at the end the company will be debt free and the directors will have time to generate funds for their retirement.

There are options available for an insolvent company however it is only by talking to the directors and gaining an understanding of the business that a solution which is in the best interest of all stakeholders can be achieved. By taking advice early these options can then be explored in full.

Emma Legdon, Business Recovery & Insolvency Partner

emma.legdon@hartshaw.co.uk

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