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Insolvency – Company Voluntary Arrangements (CVA)

A company voluntary arrangement (CVA) is a process that allows a distressed company to pay back its creditors over a fixed period of time. The company may negotiate to pay a proportion of the debt owed to the creditors as opposed to the whole amount thereby reducing its debts.

In order for a company to enter a CVA, 75% of the company’s creditors who vote at the creditors’ meeting must approve the CVA. Once in place, all unsecured creditors are bound by the terms of the CVA.

Is a CVA right for my business?

As with all insolvency processes there are advantages and disadvantages to a CVA.

A successful CVA can allow a company to restructure its cost bases or make any other necessary changes to improve its financial position while continuing to trade.

It is important to note that CVAs are not binding on secured or preferential creditors (such as employee wages or banks with security). There is also no automatic moratorium preventing creditors from taking action during the application process (unlike with Administration), so a CVA proposal may prompt creditors to consider a more formal insolvency process.

It is important to seek advice to see if a CVA is right for your business.

The process

There are strict procedural requirements and time scales that must be complied with when applying to enter into a CVA. The CVA must be supervised by an insolvency practitioner (IP). The IP plays a key role in the application process.

For a proposed CVA to stand a chance of success it is essential that you seek early professional advice.

Get in touch if your business is experiencing financial difficulties and you would like to explore whether a CVA could assist. We regularly advise companies and IPs in relation to CVAs including, drafting documentation, attending creditors’ meetings , advising on any modifications put forward by creditors or any objections. We also assist clients where a CVA proposal has been unsuccessful or where a CVA has failed.

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Insolvency – Directors’ Disqualification

Company directors can be disqualified if they do not meet their legal responsibilities. When a company is unable to pay its debts the law sets out a number of specific duties that a director must comply with. However, this is likely to be a highly stressful situation and it is not uncommon for directors to be in breach of one or more of their duties for example, by continuing to trade the business when they know it cannot pay its debts.

If this happens they may be disqualified from being a director. Disqualification is for a specified period, between two years and 15 years. During that time the director is prohibited from being a director of a company, or directly or indirectly being concerned or taking part in the promotion, formation or management of a company without the court’s permission. The term ‘director’ is widely defined in the law and can include individuals who do not have the title ‘director’.

The court also has powers to order a disqualified director to pay compensation to the Company for the benefit of its creditors.

The Insolvency Service

When a company enters into a formal insolvency process a director’s behaviour will come under scrutiny. The liquidators or administrators are required to make a confidential report on the directors’ conduct to the Insolvency Service which may investigate you if there has been a report complaint of unfit conduct.

Unfit conduct covers the following:

  • Allowing a company to continue trading when it can’t pay its debts
  • Not keeping proper company accounting records
  • Not sending accounts and returns to Companies House
  • Not paying tax owed by the company
  • Using company money or assets for personal benefit

For many directors the first knowledge they may have that there is a threat of disqualification will be the receipt of a letter from the Insolvency Service.

Next Steps

When operating a distressed business you will be making difficult decisions. Having a clear understanding of what is legally required of you is essential.

If you are concerned that you could face disqualification proceedings or if you receive correspondence from the Insolvency Service regarding your conduct as a director, you should seek professional advice as soon as possible.

We have acted for directors facing disqualification proceedings. We have also advised Insolvency Practitioners (IPs) on whether the actions of company directors amount to a breach of their duties. In addition, we have advised individuals who have been disqualified on their roles post disqualification and we have applied for leave of the court for them to hold office during a period of disqualification.

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Insolvency Litigation

We advise a wide range of stakeholders on litigation that arises as a result of a company being insolvent. This includes actions against the company and its officers as well as actions which the directors, officers or insolvency practitioners (“IPs”) pursue on behalf of the company.

Advising Directors/Shareholders

We advise directors/shareholders on numerous matters including:

  • Directors duties and how to ensure they do not breach them and leave themselves or the company open to claims.
  • Bad debts, property issues and other matters that could give rise to financial issues for the company.
  • Claims against the company and the best action to take.
  • Claims against employees, fellow directors and other stakeholders.

We regularly accompany directors and shareholders to meetings relating to disputes to enable them to obtain immediate advice on the best way forward.

Advising IPs

We advise IPs on all aspects of litigation arising out of insolvency, whether that be bringing a claim on their behalf or defending one.

We also assist IPs with applications to court for directions, administration orders and extensions and approval of their costs.

Advising banks, lenders and other creditors

We regularly advise lenders, suppliers and other creditors on proposed actions against companies which are struggling to pay their debts. Our broad range of experience means that we can give useful commercial advice on the best way to recover debts and the realistic prospects of success. If an insolvency process is the best way forward, we can work with creditors to achieve the best outcome available.

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Insolvency – Security and its enforcement

We regularly advise organisations and individuals on loan arrangements with companies which include taking security over assets in case the borrower defaults on the repayments and becomes insolvent. Clients range from banks, finance companies and private debenture holders to shareholders who have taken security for deferred consideration following a business sale or directors who have lent money to a company and require security.

We provide advice on the different types of security available and how effective each type will be in each situation. We draft security documentation and register this where required and we advise clients on how to enforce the security and the different enforcement options available to them.

Types of security

The main types of security that are granted are charges (fixed and floating) on a variety of assets , mortgages and pledges.

When deciding whether to take security and what security is appropriate, the lender must consider a number of factors.

We have a wealth of experience of advising on all types of security and can offer clients legal and commercial advice on their situation.

If you are loaning money to a company or if you are struggling to obtain repayment of an existing loan please get in touch.

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Invoice Financiers and the Financial Ombudsman Service

On 1 April 2019 the jurisdiction of the Financial Ombudsman Service (“FOS”) was extended to include additional categories of eligible complainants such as more SMEs and individual guarantors of loans. The FCA has also indicated that it intends to increase the limit of an award which can be made by the FOS under its compulsory jurisdiction scheme from £150,000 to £350,000, probably sometime later in 2019.

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Funding Credit hire and Credit repair

The Credit hire and credit repair industries and ancillary services provided to claimants in “no fault” accidents have traditionally been regarded as challenging sources of business for invoice financiers, but there are signs that financiers are becoming more comfortable with the risks involved.

It is fair to say that these industries have over recent years been subject to a number of measures by the Government in attempts to reduce overall insurance premiums, but they continue to display a sense of innovation.

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Credit Protection Revisited

The recent decision by one of the main bank owned invoice financiers to withdraw from the provision of credit protection has highlighted a continuing debate within the industry on issues arising from the interface between bad debt protection on the one hand and the provision of insurance on the other hand.

It is now widely understood within the industry that the provision of insurance is a regulated activity under the Financial Services and Markets Act 2000 (“FSMA”) which requires providers to be authorised and regulated by the Financial Conduct Authority.

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Managing cashflow and risk, coping with uncertain times

chris-mcdonoughThere are various ways in which a business can protect its business interests whether that is profit or cashflow. Many will look first at the internal workings of the business to make savings and some may never look at their other options with external parties. Having in place contractual provisions which assist you in that regard are often overlooked. The aim of this article is to provide some ideas on how a business can protect itself in these uncertain times.

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