Cash Flow Problems? Consider A Company Voluntary Arrangement
Published January 2018
When the unpredicted happens and an expected payment from a customer is not received this can have a dramatic negative affect on a company’s cash flow. Liken it to a running tap being turned off. Like a flower with no water, something that has been nurtured and grown will quickly die.
This is the position that thousands of business owners are facing following the collapse of Carillion. Already on extended credit terms and possibly already factoring or invoice discounting their invoices, many now find that they are in an over-payment position and will not be able to draw down further funds until the account has been rectified.
Even if invoices are not discounted, the expected payments from Carillion not arriving creates a huge hole in the cash flow forecasts that may not be bridged from other immediate sources. This is where a Company Voluntary Arrangement may be a solution to such cash flow problems.
What is a Company Voluntary Arrangement?
A Company Voluntary Arrangement (“CVA”) is essentially a contract between a company and its creditors setting out the financial position of the company, demonstrating that it cannot pay its debts as and when they fall due and explaining how creditors will get all or some of what is due to them over a period of time. The terms of the “contract” are set out in an official Proposal document presented by the company’s directors to creditors and shareholders who are able to put forward amendments before voting upon the final version of the Proposal.
If approved by creditors and shareholders, it ring fences previous debts and allows the company the breathing space it needs to rebuild, thus enabling the historic debts to be settled out of future profits according to the terms approved by creditors and shareholders in the CVA Proposal document.
What are the Advantages of a Company Voluntary Arrangement?
If approved by creditors and shareholders:
- Directors remain in control of the company
- A company’s immediate cash flow problems are overcome,
- Any legal actions by creditors are stopped,
- HMRC claims for arrears of PAYE/NI/VAT cease,
- Management time is not lost with having to deal with constant payment demands,
- Onerous contract terms or leases can be terminated or re-negotiated to cut costs,
- A CVA is not as public as other insolvency processes, no advertising or having to put on a company’s letterhead or web site that the company is in a CVA,
- If redundancies are required to save the company, no requirement to pay redundancy or pay in lieu of notice costs which are paid by the Government,
- No immediate calling in of any director’s overdrawn loan account,
- There is no investigation into directors’ conduct allowing them to get on with turning the fortunes of the company around.
A Company Voluntary Arrangement is a real practical solution to save a company from administration or liquidation when it has found itself, through no fault of the directors, in cash flow difficulties. It can benefit all stakeholders but it is not an easy solution and directors need to be prepared to work hard through the CVA period if it is to be successful.
Cranfield Business Recovery can offer advice to directors and their advisors as to whether we believe a company’s circumstances are right to consider a CVA. Act now by telephoning one of our three Licenced Insolvency Practitioners, Tony Mitchell or Philip Ballard on 024 7655 3700.