BUSINESS DEBT SOLUTION

Business debts can be dealt with. But it’s important to find the solution that best fits your situation, and this will mean getting reliable professional advice. The following is merely a brief guide to what may be available to you. If you’re interested and want to find out more, then please contact us for full details. And if you then wish to go ahead with a particular debt solution, we will be able to guide you through the whole process. Please note if you are a sole trader and are no longer trading then you may be eligble for an IVA or a Debt management plan

Company Voluntary Arrangements (CVAs)

A CVA is the business equivalent of an IVA (Individual Voluntary Arrangement). In essence, it’s an agreement between a firm and its creditors under which the company gets extra time to pay its debts. (The creditors may also agree to write off a proportion of the debt altogether.) Meanwhile, and crucially, the company remains under the day-to-day management of its current directors. The arrangement is administered by an insolvency practitioner known as a supervisor, but it is, specifically, a deal between the company and its creditors. The creditors will agree to this deal if they believe they will get more out of it than they would if the company had to go into liquidation.

Trade creditors may also believe that they will derive profit from future dealings with the company – a possibility that obviously would not exist if the business had to stop trading. It is up to the creditors to decide whether or not to accept the CVA; it has to be agreed on by 75% by value of the creditors who vote at a meeting specially convened to consider the proposal. They are only likely to vote in favour if they can see a reasonable return on the amount due to them. This will depend, in turn, on them being satisfied that the company will be efficiently managed and have sufficient funding to pay its ongoing expenses. More generally, the creditors will want to be reassured that the company is going to be profitable in the future even though it has had financial difficulties in the past.

A CVA is therefore particularly appropriate when problems have arisen because of specific isolated events which are unlikely to recur, such as a particularly unprofitable contract, a significant bad debt, or an under-insured disruption such as a fire or flood. From the point of view of the company’s directors, the benefits of a CVA are that:

(1) They can avoid bankruptcy or liquidation.

(2) They can retain control of the company and continue trading.

(3) They can wipe off up to 75% off their unsecured debt.

(4) The company will be guaranteed debt-free in 60 months.

(5) The debt will be consolidated into one easily affordable monthly payment. (6) All interest will be frozen and all charges stopped.

Creditor Voluntary Liquidations (CVLs)

Liquidation is the process by which the assets of a company are realised and distributed to those parties legally entitled to them, so that the company can be dissolved. A Creditors' Voluntary Liquidation (CVL) is instigated by the directors or shareholders of a company, rather than being the result of a winding-up order made by the court, generally at the behest of an unpaid creditor. The directors/shareholders control when the liquidation happens and also decide on the Insolvency Practitioner who will assist the company in the process and be nominated as Liquidator by the shareholders. (The nomination is subject to the agreement of the creditors, but they almost always accept the shareholders’ choice.) CVL means the death of the company.

It stops trading and the Liquidator is left to dispose of its assets. His or her objective is to get as much as possible from the sale of assets, collection of debts etc. so that a dividend can be paid to the creditors. There are strict rules governing the order in which creditors are to be paid. If a bank or other party holds a fixed and floating charge over the assets of the company (a “debenture”) then they will have priority entitlement to the money realised from "fixed charge assets". These could include freehold property, fixed plant and machinery, goodwill and investments. Book debts used to fall under this category, but a recent test case has thrown this into doubt. The decision is likely to be appealed, but in the meantime directors cannot rely on book debts being caught in this way.

The 2002 Enterprise Act abolished the rights of the Inland Revenue and HM Customs and Excise to establish preferential claims. They now rank with trade creditors in the pecking order. The only preferential claims are now those from employees in respect of arrears of wages and holiday pay. Employees, and in certain instances directors, can also claim arrears of wages, holiday pay, redundancy and monies in lieu of notice from the Government, in which case the Redundancy Payments Office then takes the their place as a creditor.

After liquidation, there is, as a rule, nothing to prevent directors/shareholders setting up in business again. If the Liquidator agrees, they can bid for and purchase the company’s assets. They can establish and control a new limited company. Directors are not liable for the previous company’s debts unless they have signed personal guarantees to that effect. But the Liquidator does have to report to the DTI on the directors’ conduct. If the insolvency is genuine and little or no fault attaches to the management, then this report will merely tell the DTI who the directors are. If offences have been committed, however, the report could lead to directors being disqualified from acting in that capacity in the future.