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My company is in financial difficulty and I need help

There are a variety of procedures that you can use to get over corporate financial problems and you should take professional advice to help you decide between them. A corporate voluntary arrangement, also called a CVA, might well be the one approach that really helps you.

CVAs are a powerful but often overlooked way of writing off much of the company’s debt, avoiding financial difficulty and leaving control of the company with the directors.

CVAs are unlike other procedures such as Administration or Liquidation because the directors have a great deal of flexibility in the type of proposal they make to the company’s creditors. In outline terms, the directors of a company in financial difficulty, with the advice of an insolvency practitioner, work out a plan which sees the creditors receive a payment in the £ for the amounts that are owed to them. The proposal is put to creditors in a meeting and if they agree the proposal then they are bound by it.

Here is an example:

Jim Thames has a small engineering company which has a sound underlying business. Since the recession sales have fallen and the company has struggled to pay its creditors which now stand at £100,000. Jim knows that the sales have started to pick up but his company is stuck with these old debts it cannot afford to pay.

Working with a insolvency practitioner, Jim prepares a cash flow which shows that if the company did not have to pay the £100,000 in full it would generate free cash flow every month of £5,000. Jim and his advisors put together a proposal to creditors which sees them paid a dividend of £1,000 per month for 3 years i.e. a total of £36,000. If creditors agree to this proposal they will receive 36% over 3 years and the remainder will be written off by them. Jim will hold on to the company and the company will be free of its debt.

Why would creditors agree? Because the insolvency practitioner has worked out that if they don't agree then the company will go into liquidation and they will receive nothing because the plant and machinery has no value to a third party.

In this example the CVA has been funded by the company’s trade. Other ways to fund the trade include selling excess plant and using the proceeds, obtaining third party investment, selling part of the business etc.

CVAs are a flexible and powerful approach.

Please note that the above is provided for illustration purposes only and comprises a short view of extremely complex insolvency and other legislation. This is a complicated area and specific advice must be sought before undertaking any course of action or before refraining from any course of action. Gore and Company takes no responsibility for any loss incurred to or by any person who either acts or refrains from acting on the basis of the above or of any other item published on this website. The above note may not be reproduced without the prior written consent of Gore and Company.

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