Guide to the Cashsolv Company Voluntary Arrangement process

Guide to the Cashsolv Company Voluntary Arrangement process A Guidance Paper by Cashsolv TM The way forward, made brighter Cashsolv TM is a Portland Business Support & Advice service

Contents What is a Company Voluntary Arrangement (CVA)? Who can propose a CVA? How long does it take? The CVA process a step by step guide CVA Frequently asked questions Key areas to think about 2 2 3 3 5 7 Employees and redundancy in a CVA Directors overdrawn current account Using a CVA to restructure an acquisition Using a CVA to restructure a sale / retirement planning Conclusion: The risk of doing nothing 8 1

What is a Company Voluntary Arrangement (CVA)? Does this sound like you? We have put everything into building our business, but it has not been easy and we are struggling to keep up with creditor payments. What can we do to get back to running our business, without the constant cashflow pressure? If you recognise this situation, it sounds like you could really benefit by talking to us about a Company Voluntary Arrangement, usually known as a CVA. A CVA is a legally binding agreement with your company s creditors, whereby the creditors agree to be paid what the company can afford, not necessarily what is owed and to write off the balance. Under a CVA you will keep control of your company and continue to trade as normal. The CVA ensures that the amounts owed to the unsecured creditors are legally frozen, thereby allowing you to concentrate on moving the company forward. A CVA is usually based on the company continuing to trade and surplus funds being used, over time, to pay agreed dividends to the creditors. Its key advantages are that the business continues to trade under the control of the directors, without the turmoil and distress of a formal insolvency and the creditors usually get back more than they would have done if a formal insolvency had happened. More Advantages of a CVA A flexible legally effective business recovery tool Low cost process The business can continue trading without a change in ownership No need to borrow more money Existing personal guarantees are protected Reduces cash flow pressure Realistic repayment structure Offers creditors a more positive outcome than company closure or Liquidation Provides protection to the company from any legal action by creditors An opportunity to restructure the business, removing unprofitable areas Historic debts crystallise, so no additional interest is incurred No cash cost if redundancies required Defined timescale The balance of unaffordable debt is written off for good Who can propose a CVA? A CVA may be proposed by the directors of the company, if they believe that the business has the potential to be viable, with a restructuring of its debts. It is a way of preserving a business with cashflow difficulties, or where a downsizing of the business has taken place or is required. 2

How long does it take? We will be able to quickly assess if a CVA is likely to be the way forward for you. If you agree with our assessment and you wish to proceed, we will build the proposal to be put to creditors. This is essentially a short business plan which supports the offer to be made, together with the rules of the arrangement. We fully understand that whilst this is being done, you still have a business to run, so we will take care to make the process as easy as possible for you. Whilst it is possible in an emergency to prepare the documentation within a few days, it will normally take somewhere between 2 4 weeks to gather all the information we need and put it into a format suitable to be presented to creditors, ensuring that it has the best chance of being agreed. Whilst this is taking place we will assist you in dealing with any immediate issues that may threaten the viability of the business or any concerns that you have regarding the process. Once the CVA is approved, it will last for as long as you need to be able to pay creditors enough of their debt to agree to write off the balance. This usually means regular payments based on what you can afford are spread over 3 5 years, and the amount you are able to pay is accepted by creditors in full and final satisfaction of the all debts. The CVA process a step by step guide Getting started You instruct us to deal with all the drafting of the required documentation, under the terms of a letter of engagement that sets out our responsibilities to you. Whilst the documentation is being prepared, the company should not materially increase the amounts owed to any creditor, suppliers should be paid effectively pro forma. We will give specific advice to get you and the business through this period and we will assist you with the cashflow and practical issues this raises. Our priority is to ensure that the business continues, so that the arrangement is approved with a successful outcome. Depending on the financial information available, we will either assist with the preparation of financial projections or review those prepared by others. We will also assist with a commercial sense check, which in simple terms means assess what can be done to ensure that the arrangement will work including meeting the financial projections and what steps can be implemented to improve the business performance. We have many years of experience in these matters and often find our outside perspective will generate ideas and suggestions that will improve profitability. With our help, we can explore and incorporate any changes to the business that you know are required but have been unable to fulfil due to the implementation costs. This particularly applies to staff reorganisations including redundancy and / or premises moves. Once the draft documentation is finalised, it is ready for approval by the Directors and sending to creditors. At this point we will become known as the nominee and our job is to follow the legal procedure required to make sure that you get the full protection available under the CVA. The final stage before the proposal is sent to creditors is to set the stage. By this we mean give advance warnings to any particular parties that you feel need extra attention. This may, as an example, include the company s landlord, a key customer, members of staff etc. The point is to make sure the CVA is looked upon as a positive step forward and avoid a negative reaction by taking them by surprise and not getting the chance to explain the benefits to them. 3

Approval by creditors Where there is a debt to a bank, typically the bank will want to ensure that its own position is not adversely effected by the CVA, which in fact is highly unlikely and provided this is the case, they will normally be pleased to see that the directors are taking proactive action to deal with the company s problems and will be supportive. In anticipation of the CVA being approved, provided the creditor position is not made worse, cash flow assets such as work in progress and monies for work done, can be collected to be used as a fighting fund for when the CVA is approved and to give the business an extra boost. The CVA documentation is filed in court as a formality (there is no court hearing), prior to it being sent to the unsecured creditors, with notice of a meeting and a proxy form for use by creditors at the meeting. In most cases, the meeting is not attended by creditors, as most choose to vote by proxy. A minimum of 17 days notice (14 days plus time for postage) must be given of the meeting date. The meeting is chaired by the nominee or one of his staff. At the meeting, the creditors vote on the proposal and the proposal will be approved if 75% by value of debt of those that actually vote are in favour. In most cases, the majority of creditors do not vote, so the approval threshold is actually much less than 75% by value of all creditors. There is a second technical vote, based on excluding connected creditors and not more than 50% of remaining creditors not voting against the proposal. Provided that the ground work has been undertaken and the proposal is sensible, nearly all CVA s are approved by creditors at the first meeting. If any specific issues arise, it is possible to negotiate modifications to the terms of the proposal and if necessary the meeting can be adjourned for up to 14 days by the chairperson. The proposal also has to be approved by the shareholders by simple majority (50%) and their agreement in principle will have been obtained at the outset, so that vote should be a formality. Once the CVA is approved The chairman of the meeting will issue a chairman s report, within 4 days, to all creditors and the court, stating who voted and how they voted and the outcome. All unsecured creditors are legally bound to the terms of the proposal and cannot pursue their debt outside of the CVA. There is a period of 28 days after the CVA is approved for a creditor to apply to the court if they are unhappy with the technical way in which the process has been conducted, or if the CVA specifically prejudice s them by treating them differently to other creditors. The company will continue to be managed and under the control of the directors. The company will comply with its obligations, as promised to creditors, in the terms of the arrangement, usually by making monthly instalment payments for the agreed period. At the end of the CVA All of the funds will have been distributed to creditors and the supervisor will notify creditors of the end of the arrangement and as a result the company is released of all obligations to the creditors, including the balance of any unpaid debt. The company continues under the control of the directors and in the ownership of the shareholders. 4

What if there is a problem during the CVA? The CVA is carefully designed to accommodate most issues that arise in normal trading circumstances. If however, you suffered a major bad debt, lost a major customer or suffered ill health or something similar, it is possible to vary the terms of the arrangement during the term. This involves explaining the problem to creditors and seeking their agreement to a variation of the terms. This is part of the inbuilt flexibility that makes a CVA a successful business recovery tool. Our role is to help you through this process, so if something goes wrong we will be on hand to advise and support you. Company Voluntary Arrangements - FAQs Is it expensive? How do we pay the cost of a CVA? There is no extra cost to you as all the costs of the CVA are paid out of the affordable payments and they are also typically lower than the alternatives, so creditors also benefit. In reality and what happens in practice, is that the costs can easily be borne out of the savings made in not having to pay all creditors on normal terms. Compared to other forms of business recovery a CVA is much better value for you and the creditors. Will we loose our customers? No, they probably will not even know about the CVA, unless you choose to tell them. Even if they did find out, the risk of loosing them is very small as most customers just want to make sure you will not let them down and you can point out the CVA puts you in a better position than when you had creditors hassling you all the time and that you are now able to spend more time focussing on their needs rather than juggling creditors. Will we get credit from our suppliers? As much as they will be disappointed that you are unable to pay them in the normal course of business, the fact is that under the CVA you will be able to pay them something and they may also have a continuing customer. In the short term they may require cash up front, which can be sourced through other not having to pay existing debts, but typically this is relaxed fairly quickly once they see you operating normally. If you are concerned about specific creditors, we will help you to liaise with them in advance of the formal documentation arriving on their desk, to explain the situation and the benefits of the arrangement to them. What about our employees? Employees will typically be relieved that they can see a future for the company. Despite all best attempts to keep the financial situation confidential, they are probably already concerned about the situation and it will be a weight of their shoulders that it is being addressed. If an employee does resign they will loose their employment rights and will not receive any redundancy, or payments in lieu of notice. By resigning they may also loose their right to certain state benefits. Employees will therefore normally be supportive. An added benefit, is that this positive attitude can also be utilised to get them to up their game and make the business more efficient. What about the bank? The banks are desperately trying to avoid their own bad debt and bad publicity, so unless there is an overriding compelling reason to stop the CVA they will normally be happy to sit in the wings and allow it to proceed. The bank is usually a secured creditor and will remain so during the CVA. Getting the bank on side is simply part of the work we do at the early stages of preparing for the CVA. 5

Will HM Revenue & Customs vote against the proposal? Not if it has been properly thought through and well prepared and there are no exceptional circumstances. What about Landlords? The CVA captures all debts at the time it is approved and all debts arising out of obligations that existed at the time of the approval and this principle applies to rent due under a lease. There is case law to support the argument that future rent is also included if the premises are vacated prior to the CVA. If the premises are used whilst in the CVA, future rent payments must still be paid to cover the period after the CVA is approved. Is it too late if a creditor has issued a winding up petition? NO! The court would rather the company entered into a CVA than go into liquidation, so if there is a reasonable prospect that CVA proposals would be approved by the company s creditors, it is relatively easy to get a winding up petition adjourned. The petitioning creditor will usually be HMRC, in which case they will normally agree to an adjournment of any hearing to allow time for the CVA to be prepared and the creditors meeting held. If you are being pursued by an aggressive trade creditor, they will know that they cannot legally exploit their position to get paid ahead of other creditors and that their best chance of getting some money back will be under the CVA. Isn t it easier to just liquidate and start again? Yes in some cases, but you need to consider all the facts before making a decision: CVA Directors remain in control. Time to put together a plan for survival with expert help. CVA terms designed to suit the company. Creditors are more likely to look favourably upon directors. Less reputational damage to the company and directors. No risk of directors disqualification. Less likely to default on bank debt, so personal guarantees not activated. Typically self funding as the current assets of the company available for working capital. No new capital needed to re-start, simply use existing assets. Liquidation If a phoenix is planned the purchaser needs cash to acquire the assets and working capital to fund the new company. Difficult to continue trading whilst the liquidation process is underway. Landlord may terminate the lease. The Directors personal guarantees will automatically be called upon. Less reputational damage to the company and directors. New company must register for VAT and tax. New bank account will be required, which can be problematic following a liquidation. Directors conduct will be investigated. 6

Key areas to think about Employees and redundancy in a CVA The CVA can be used to capture the liabilities to employees who made need to be made redundant as part of a restructuring plan. This is often critical in deciding how to restructure direct costs and overheads to ensure the future of the business. Key steps to dealing with redundant employees: 1. Identify the roles /people required to be made redundant. 2. If possible, pay their salaries up to the date they are made redundant, and any holiday pay due. 3. Issue a P45 and ask them to leave immediately 4. We will provide you with a letter to give them explaining how they can claim redundancy and monies owed in lieu of notice from the Redundancy Payments Office (Government). Note that their claims will not be processed until the company s CVA is approved by creditors. Hence why to avoid personal hardship, it is morally better to make sure their salaries are paid up to date. The CVA can be used as an effective tool to restructure employment, to save the company for the greater good of the remaining employees. If an unhappy ex employee seeks an award against the company at a tribunal, provided the employees were dealt with prior to the CVA, the claim falls to be dealt with in the CVA. The employees will get all or most of their money from the RPO, so they typically see no benefit in pursing any further claim. Directors overdrawn current account A major issue in a formal insolvency is the director s personal position in relation to overdrawn loan accounts. Usually the directors are also shareholders and the accountant has advised that it is more cost effective from a tax perspective, to draw income as dividends rather than salary. This is fine if the company is profitable, but if it is not, there will not be sufficient profits available to pay a dividend and technically dividends can only be paid out of profits. If there are insufficient profits available, any dividends paid are illegal and therefore the payments will automatically be treated as a loans from the company to the director / shareholder and therefore, repayable in an insolvency. This is an unfortunate situation when the amounts paid were effectively salary for work done, but arises as a result of the directors also being shareholders. The options for dealing with an overdrawn loan account include: 1. Repay the debt. A not particularly attractive option, especially if the amounts were taken in lieu of salary. 2. Set off any loans you have made to the company against whet you might now owe back. 3. In the future, draw a larger salary, but use some of it to repay what you owe. 4. Use future profits to declare dividends and use these dividends to repay the loan. 5. In the CVA, ensure the drawings are treated as salary and correct the PAYE Scheme. 7

Using a CVA to restructure an acquisition. If you are purchasing an insolvent company, you may be able to acquire the shares for nominal value and then use a CVA to restructure the amount of debt, employee / property position and get the business into a viable shape at relatively low cost. In fact, under a well drafted CVA the business will effectively pay for itself and at a much lower cost than significant due diligence or having to find the purchasing funds and the working capital funding. Using a CVA to restructure a sale. Dealing with historical debt through a CVA can be an effective method of enhancing the future value of the business. If you are looking to retire in say 7 years time, repaying the affordable debt over the next 3-5 years and having the balance written off, will give you a few more years of successful trading to boost the business value before retirement. If you don t deal with the debt in a CVA, you could find that the company is still carrying debt it cannot afford when you come to retire, in which case the value of the business will be severely reduced. This is part of a long term plan, but as most business owners rely on the value of their business to provide them with a retirement fund it is an important consideration. Conclusion: The risk of doing nothing Whether a CVA is right for you will be a personal decision based on what s important to you and the facts around your business. Having been through a massive economic downturn over a number of years, many businesses have a legacy of debt built up over those tough years. Whilst the economy is not quite steaming ahead, now is the time to prepare for the future, by dealing with the legacy of the past. A CVA is a restructuring tool that is perfectly designed to deal with this situation. It enables companies to move forward with a cleaner balance sheet and ready for growth. The most important thing when faced with financial distress is not to do nothing or put it more simply to do something. Whether you need the benefits of a CVA to help you or whether you can put a plan together without a CVA, either way positive action is required. The companies that rely on an improving economy to correct their balance sheets and deal with their historical debt are likely to fail or are in for a very long haul with little financial reward and an uncertain future. We would never encourage anyone to make an important decision without being clear on the options available and the implications. We are licenced, regulated and professionally insured to carry out a CVA on your behalf. We offer a free no obligation meeting before any commitment is made, so that you can make the decision that is right for you and your business. 8

The Cashsolv approach We provide help and advice for businesses and individuals to overcome cashflow problems, so that your business can go on to not only survive but also to prosper. Whatever your needs, we will represent your interests with professionalism and sensitivity, independent of vested interest, and with the personal attention of our senior people. We offer an innovative combination of new funding through emergency loans and asset-based lending, as well as uniquely, being able to take pressure away by reorganising your existing debts, all without a value-destroying insolvency procedure. For a no obligation discussion, please contact one of our senior people by telephone or email for an immediate response. 9

This document explains the relevant position only in general terms and omits details less commonly experienced for the sake of brevity. It is not intended to be used as formal advice about your actual situation, for which you should consult us specifically and not rely upon this document. Cashsolv would be pleased to advise you formally and you should contact one of the directors listed on the website at www.cashsolv.co.uk to arrange this or telephone our main switchboard on 01489 550440. Cashsolv regrets it is unable to accept any responsibility to anybody who seeks to rely on this document. Cashsolv Unique Cashflow Solutions, Eagle Point, Little Park Farm Road, Segensworth, Fareham, Hampshire PO15 5TD Cashsolv TM is a Portland Business Support & Advice service South East Office Eagle Point, Little Park Farm Road, Segensworth, Fareham, Hampshire PO15 5TD Tel: 01489 550 440 Fax: 01489 550 499 South West Office The Outlook, Ling Road, Poole, Dorset BH12 4PY Tel: 01202 712 810 Fax: 01202 712 818 London Office 14 Basil Street, London SW3 1AJ Tel: 020 7925 2651 Fax: 020 7925 2652 Email: post@cashsolv.co.uk Web: www.cashsolv.co.uk