One thing I find myself thinking regularly when meeting a director of a struggling company for the first time is “I wish they had come to see me months ago”. Not only would it have saved them several months of unnecessary stress, but it would have given me more time to be able to work with them towards a solution. A lot of directors simply do not realise it is time to get help, whilst others do not want to admit that there are cash flow problems. Whilst this is completely understandable, it can, if left too late, restrict the options open to the company, although it is never too late to try to save a business.
Solutions to your cash flow problems
If contacted early enough, rather than simply closing the company, there may be other options. We may be able to put a CashPlan in place, an informal agreement with creditors being paid over time. If a more formal arrangement is appropriate, we can help directors to put forward a Company Voluntary Arrangement (sometimes incorrectly known as a Creditors Voluntary Arrangement or Creditor’s Voluntary Agreement) to creditors. A well drafted CVA will result in a win / win situation, the company is able to write off debt it cannot afford and creditors receive more than if the company were simply closed down.
A Company Voluntary Arrangement
When taxes are in arrears, suppliers and creditors are chasing for payment and there is not enough money to go around, it is time to get help, before the company burns its bridges with its suppliers. At this stage, companies have hopefully still got a working relationship with suppliers and HMRC is not banging down the door.
The first important point when applying for a Company Voluntary Arrangement is to consider, will creditors support it? For a CVA to succeed three quarters by value of the actual voting creditors must vote for it. In a lot of cases VAT arrears and PAYE arrears may be significant, this does not mean that a Company Voluntary Arrangement is not possible.
HMRC will still support a Company Voluntary Arrangement in these situations, provided the company can show it has been completing its returns and making some attempts to pay. Even if a company has a time to pay arrangement, HMRC will still consider a CVA.
Creditors often agree to Company Voluntary Arrangements
So, creditors are likely to support as the Company Voluntary Arrangement is right for them, as it gives a better financial result, and a customer is not lost, but is it right for the company? Although a CVA allows for unaffordable debt to be legally written off, creditors will expect to be paid back what the company can afford usually out of future profits. The company will also need the money to pay for its ongoing trading and be able to generate enough profits. More importantly it needs to make enough to pay back the agreed contribution to the Company Voluntary Arrangement for the old debts. The directors of the company must have detailed short term cash flow and profit forecasts, as well as long term projections. The company must be viable and there must be a real chance that it will be profitable going forward. The underlying business needs to be looked at carefully to ensure that the plan that is being entered in to is affordable. It is a good time to look at how the company has got to this point, and what will change to ensure it does not happen again.
A successful Company Voluntary Arrangement will result in the company coming out the other side debt free, but it cannot be entered in to lightly. A CVA usually lasts for around 3 to 5 years, during which time the directors of the company will be working hard to pay for what is currently due and the debts that have built up. It is therefore important that the directors have a desire to save the company, without this the Company Voluntary Arrangement simply will not work.
Whilst it is a big commitment, a successful Company Voluntary Arrangement will result in a saved company, which in turn will mean jobs are saved and hopefully result in a company with a good trading future ahead.
If you feel that a CVA may be appropriate for you or a client, or if you are facing pressure from your creditors, contact us now, we are here to help.
For further information, download our Guide to the CVA process or view our relevant pages: