Debbie Cockerton explains the benefits of interlocking voluntary arrangements.
With all the different types of insolvency processes, perhaps the voluntary arrangement is the least discussed, but is the one process that can sometimes be a godsend to a company or an individual. It throws them a lifeline and is a way of getting through a difficult time; it gives them control and time to pay off their creditors, with a structured way forward.
At DCA Business Recovery we have recently completed an interlocking Company Voluntary Arrangement (CVA) and Individual Voluntary Arrangement (IVA). This was a good staff morale booster, as we helped to save the company and business, the employees, the director and their family.
The director had company debts and had taken loans out in the company name to provide extra funding for cashflow. The director had also given a personal guarantee for these loans, so with our assistance he proposed a CVA and interlocking IVA, so that they both have to be accepted by creditors.
When a company is having cashflow problems, the directors may put in their own monies if they have any savings, or may look to use their own credit cards, or take out a personal loan to inject much-needed cash into a company at a time of difficulty.
It can sometimes be a quicker and easier way to inject monies into a company, especially if the directors have equity in their own property or savings and the company does not have many assets on which to raise capital.
In this particular case, the reason for the interlocking voluntary arrangements was as follows:
• The IVA was dependent on the CVA being accepted to preserve the company as a trading entity and enabled the director to continue working and drawing a wage.
• The CVA was dependent on the IVA – without the acceptance of the IVA, the director would most likely declare bankruptcy, and as a result could no longer act as a director. It is most likely that by doing so the company would be forced into compulsory liquidation, which would result in a lower dividend for all creditors. The director would then lose control of everything – it would be like a house of cards falling down.
By accepting the voluntary arrangements, creditors would know that they are getting the best return on the table and that the process would be monitored by an insolvency practitioner, who monitors that the payments are made on a monthly basis.
A voluntary arrangement does not have to mean that the creditors receive payment in full, but it has to be the best offer that the company or individual can make. Any voluntary arrangement is a composition of the creditor’s debts in full and final settlement. This will typically be over a five-year period and based on making contributions from future profits.
In short, a voluntary arrangement is a legally binding agreement between the company and its creditors; that enables the company to freeze all unsecured debts and repay them over a period of time from trading profits of the company. The company can write off a significant proportion of its debts if the support of its creditors can be obtained. Changes must be made to the way the business is run to ensure the successful completion of the CVA and future of the business post-insolvency.
A voluntary arrangement, if it is accepted by 75% of those voting (present or by proxy and calculated by value of the debt), means all creditors are bound by the proposal. Therefore, if only one creditor votes in acceptance and all others fail to vote all creditors are bound.
Obviously, any voluntary arrangement would only be considered if there is a viable business that can be turned around and the problem is a temporary cashflow problem and creditors are chasing. A voluntary arrangement is hard work to see through, but at the end the company or individual has avoided liquidation or bankruptcy, staff have their jobs and the creditors will receive a higher dividend.
Although at the start of this article I stated that voluntary arrangements are perhaps the least discussed, it is worth knowing that Debenhams, House of Fraser and New Look are some of the recent high street companies that are going into a voluntary arrangement.
A CVA is an extremely powerful procedure and used correctly can save a business. However, as it is generally a five-year term, it is most important to seek advice early and to ensure that the CVA is affordable and that the company is able to meet its monthly payments for the full period.
• Debbie Cockerton is a Partner at DCA Business Recovery. The dedicated ICPA Freephone Hotline (0800 066 2540) is open 365 days a year, from 8am to 8pm.
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