Why you must always consider employees and redundancy during a CVA

There are many key considerations which must be taken in to account when proposing a Company Voluntary Arrangement (CVA).  It is key to get the figures correct in order that creditors can consider the CVA, and the alternatives, to establish whether they are willing to support the arrangement.  Getting the CVA calculation right is therefore of paramount importance.  Having a specialist firm throughout the process of proposing the CVA consulting on these points will ensure that everything is covered properly.

The CVA must work for everyone involved

The key to a successful CVA is that it works for everyone involved.  The arrangement must give creditors a better return than they would receive in an insolvency in order that they do not simply issue winding up petitions.  It must also work for the company, there is no point in proposing a CVA which is desirable to the creditors if the company will be unable to fulfil the obligations and therefore subsequently fail.  Getting the balance right is therefore key.

All costs must be considered in a CVA including taxes on employee wages

The starting position is to work out how much the company can afford if all unsecured creditors are frozen and therefore only current obligations are required to be paid.  This will then give a monthly contribution that the company can afford to pay.  It is vital that allowance is made for all expenses to be included, including the tax associated with employee wages and VAT as failure to pay these across on time will jeopardise the arrangement.

In liquidation redundancies are assumed and can be costly

The next step is to work out what the creditors would receive if the company were to enter in to liquidation (ie taking the sales price of the assets and splitting them up between the creditors, after costs).  This is where a professional will be able to assist as these are factors which can often be missed.  Employees can now be a key factor.  In a forced closedown it would be assumed that all employees would be made redundant.  For some companies, particularly those in the service industry, this can be a significant expense, particularly if the company has loyal employees with high levels of years’ service.  If you take an example of a company employing ten employees earning £24k each (less than the UK average) with an average of ten years service the redundancy will be in excess of £46k, if these employees are over 41 then this rises to almost £70k.  Take this to a larger employee base and you can see how material it can become.  Depending on the level of debt the company has this could have a significant impact upon the dividend which would be payable to the creditors.

Can any cuts be made to increase creditor payments?

Now that the two calculations have been prepared, the next step is to consider whether the company can make any cuts to increase the amount that could be made available to the creditors.  The CVA is a good opportunity to consider all costs and whether they are a necessity.  Just because the company has always paid something out, it does not mean that it is right.  Included in this would be reviewing rates, rents, supplier prices and anything else which has not be reviewed for some time.  It may be difficult though to negotiate with some suppliers if they have a historical debt and are being asked for that to be paid over time or an amount written off.  Another consideration are the employees.  Are there any redundancies that need to be made?  If so, this could be the right time to do so.

Redundancies in a CVA can be paid through the Redundancy Payments Office

For many companies the roles of the employees have changed over the years as technological improvements have made some processes more streamlined.  For some this could mean that roles previously required in the company are no longer relevant.  The cost of making redundancies can be high and when a company is experiencing cash flow difficulties it can become too expensive and not an option.  If this is the case, then the CVA could give the company some more breathing space.  The employees to be made redundant can be done so and paid through the government scheme, the Redundancy Payments Office.  This will ensure that they get their payment within around a month.  The government will then wait in the CVA to be paid along with the other creditors.  This spreads the cost of the redundancies that the company may otherwise have been unable to afford.

A CVA proposal can then be presented

Following the streamlining process the company will now have a cash flow which will show how much extra it is making each month which it can afford to pay in to a CVA.  Given that the contributions will be paid over a three to five year period in most cases, it is important that provisions have been made for increases in prices, rents, rates, tax etc as far as they can be estimated.  A small general provision must also be made to ensure that the company holds sufficient funds for those unexpected events to ensure that the company is not cash starved.

After all of this work there should now be a CVA calculation which shows how much the creditors will receive in the CVA which needs to be in excess of the amount that they would receive in a forced shutdown.  This will then be used to form the basis of the CVA proposals which will be put to creditors to consider.  Getting the CVA calculation right at the outset is key to ensure that the proposal is viable and the employees can be a key factor of this.