Self employed businesses should consider taking out a Company Voluntary Arrangement (CVA) to protect company assets in the event of insolvency. Introduced as part of the Insolvency Act 1986, a CVA can be used to throw struggling businesses a lifeline providing certain criteria are met.
A CVA is simply an arrangement between the company directors and their creditors which sets out how the company intends to deal with outstanding debts. The document must also offer creditors a better return than other insolvency options, otherwise they are unlikely to vote in favour of the CVA. A typical CVA will run for a period of 3-5 years.
What are the key drivers of a CVA?
When using a CVA the directors stay in control of the company and manage its finances and shareholders retain ownership. In order to persuade creditors that a CVA is the best route for your company present the benefits and key drivers that the arrangement governs. They are as follows:-
- freeze and discount debts in order to rescue the company as opposed to entering into an administration or liquidation
- rationalise a business pre-CVA so that it can be profitable and cash generative going forward
- offer to pay creditors monthly contributions from cash generated by future profits
- Provide calculations that demonstrate creditors will receive a better return than going into administration or liquidation
- Discount or freeze creditor debt to reduce the pressure on cash flow
- Profit used to pay outstanding debts is not chargeable for tax purposes
Administering a CVA
It has been known for CVA´s to fail which may raise concerns with stakeholders. Lenders are more likely to buy into the turnaround plan if the company has a strong management team backed by expert advisers, a core business capable of generating profit and adequate working capital.
When presenting a CVA proposal to creditors, directors should be conservative when it comes to just how much money they can afford to pay back on a monthly basis. If you offer too much, you are likely to exhaust your working capital and the CVA will fail. If you don´t offer enough creditors may refuse the proposal.
There is no harm instigating a conservative proposal in the initial stages providing you insert a clause that provides for increased contributions should the company improve their profit margins. It is advisable to consult with a team of qualified charted accountants to prepare a CVA for proposal to creditors.
Taxaccolega, a low fixed fee accountant in London, is a team of experienced accounts that understand the challenges faced by company plans and have the expertise to assist you in rationalizing your business. As part of the rescue plan we will advice you how to work with your capital and how to successfully sell the idea of a CVA to creditors.
If you need to prepare a CVA or would like some advice about the benefits and conditions of such an arrangement call us today on 08000 235 234 or email firstname.lastname@example.org and speak to one of our advisors.