Nichola Ross Martin's Tax Consultancy

As a result of the 2002 Enterprise Act there are two main ways of trying to rescue or save all or part of a company that is in financial difficulties – these are by CVA or by administration.

Company Voluntary Arrangement (CVA)

Under a CVA the directors make a proposal to the company’s creditors to enable the company to be saved by accepting less than they are owed. If the company agrees by majority, and 75% of the creditors agree, the proposal is binding on all the creditors.

Small companies (as defined by the Companies Act) are able to obtain a 28-day moratorium from their creditors to allow them time to put forward a proposal. This is obtained by filing an outline of the intended proposals with the court, together with a report by the insolvency practitioner nominated to oversee the proposal.

A CVA has several advantages:

• Management control remains with the directors.
• A CVA can be a cheaper option than administration, because although the arrangement is supervised by an insolvency practitioner, the directors are responsible for carrying out the proposal.
• Small companies have a 28-day moratorium from their creditors which gives them breathing space to map out a suitable proposal.
• A simple and easy process, ideal for small and uncomplicated businesses.

There are disadvantages for:

• The insolvency practitioner; it can be difficult to monitor the arrangement outside the company (his actions are also open to challenge by all parties).
• The directors; who have to file detailed proposals of the intended arrangement at an early stage.

How to start a CVA

You need to enlist the help of a licensed insolvency professional, then ensuring that your accounts and cash flow forecasts up to date, draw up a statement of affairs, create a proposal and then start negotiating.

Most creditors will prefer to accept something rather than nothing, but 75% have to accept your proposal, and this may be difficult if your main creditor, for instance your bank, does not have any faith in your management abilities. For step-by-step help for directors, see FAQs: Directors and insolvency.