Companies often end up in a situation where a creditor has presented a winding up petition for tax arrears. Winding up petitions are often presented by HM Revenue and Customs for unpaid VAT and/or PAYE. A winding up petition will probably not be unexpected and will be indicative of wider financial problems in the business. The question then is, what can be done or this really the end for the company?
The good news is, that if quick action is taken then the company can be saved and even left in a more robust financial position. If the company is otherwise profitable but in financial difficulty because of historically large creditors, the directors may be able to propose a plan that pays creditors a sum of money in full settlement of their claims over a period of a few years and therefore allows the company to carry on trading. Called a corporate voluntary arrangement, or CVA, more than 75% of creditors (in value) need to approve the plan (and more than 50% of the shareholders). Once approved, the proposal is binding on all creditors, whether they voted for or it or not. The directors retain control of the company and manage it in the normal way. The only obligation is to pay the promised amount to the supervisor of the CVA (a licensed insolvency practitioner) who collects the monies and makes a payment to the creditors, say, every six months until the agreed amount has been paid.
Although the CVA proposal will take a short time to prepare, the company can gain protection from its creditors by either applying to the court for a moratorium (assuming it meets the conditions) or placing the company into administration. Although a licensed insolvency practitioner will then be appointed administrator responsible for managing the company, he can propose the CVA, seek its approval and then hand the company back to the directors. Whilst the moratorium or the administration order are in force a creditor cannot proceed with its winding up plans. Hence the company is given protection from its creditors and the breathing space to prepare plans and proposals that will save the company and see it return to financial health.