Written ByKeith Steven
Managing Director
Keith is the Managing Director of KSA Group Insolvency Practitioners which has been established for 25 years. The company has undertaken more CVA led rescues than any other firm. Read our case studies to see how.
Q: What is an IVA ?
A: Think of it is a deal. Closing a business will often result in very little return for its creditors. This is because the costs of closure and the loss of value of its assets leads to very low levels of money being generated for your creditors. If the business can be viable (can generate some profit in the future) doesn’t it make sense to use those profits to pay back something to the creditors? This is the basis of an IVA it is a deal between you and creditors to repay back something over time from the business and to ensure that creditors interests are maximised.
Q: What is needed to make an IVA work?
A: It may be necessary to make changes to the business but if the underlying business idea is sound and you are determined to make it work and succeed, then an IVA can work. If however the business isn’t viable, no matter how it is restructured, then you should consider other options such as bankruptcy.
Q: Why have I not heard of IVAs?
A: Over 6,000 people enter IVAs each year. It is a well regarded, ethical and moral way to deal with debt problems whilst avoiding bankruptcy. Also its not advertised and is discrete so most people are not aware that an IVA is in place.
Q: Why not just close the business?
A: If your determination is in question or you cannot see how the business can be viable, then closure is necessary. Remember, if you cannot pay off the business debts the creditors can press for action or for your bankruptcy. Of course you should consider the options page to decide what is the appropriate course of action. It is probably better to have considered your objectives before making any decision.
Q: Isn’t bankruptcy a better option?
A: If the business is not viable, possibly. Also consider trading out, refinancing and debt consolidation. But the key test is – is it viable? And are you determined? If you answer no to either of these, then bankruptcy maybe the most sensible option. Consider your objectives and your options first before making such a decision.
If you have any doubt as to your current position and what you need to do, please do not hesitate to contact us by e-mail or by our freephone number.
Q: What are the benefits of an IVA?
A: See IVA guide for detailed discussion of this. In summary: it is a deal that prevents creditors from taking legal or debt recovery action against you and the business. It allows structured repayment based on affordability. It can be relatively cheap and it is a quick process. IVAs can give a breathing space while you work on the business to see if it really can be profitable. This is known as a holding IVA.
Q: What is a holding IVA then?
A: A “holding” IVA can be used where predictability and forecast ability are not strong in your business. It maybe that the business has only just arrived at a point where sales are at a sensible level and it may take some time before the company or business can be profitable. The holding IVA can be used to freeze the current debts until more realistic forecasts can be made of the business’s ability to repay those debts. This is a very specialist area and you should only take advice from experienced turnaround and recovery experts: In this regard please feel free to contact us on 08009700539.
Q: I have heard that the tax authorities don’t like IVAs, so when would they and when wouldn’t they support them?
A: Whilst HMRC will not support badly structured or poorly conceived IVAs, they will support sensible deals. It is our experience that the Inland Revenue and VAT creditors want to see the problem dealt with and crystallised.
They may not support a repeat IVA or where they believe that a fraud has taken place.
If the debtor (you) does not recognise, or take action to deal with the situation they will eventually take action to recover their debts. This is the key – you must take action to deal with the situation if you’re insolvent.
Consider warning signs, your objectives, your options and all the other pages on the site. Then decide to act!
Q: How much does it cost?
A: This is a very difficult one to answer because, of course, this varies on a case-by-case basis. But the main areas of cost are as below. If you have any questions with regard to this please speak to a turnaround practitioner or an insolvency practitioner or call us.
Q: How do I work out how much I can pay back to the creditors?
A: This is a very important question. It is vital to do a deal with creditors that your business can live with and achieve. There is no point in trying to repay more than the business can afford. In all cases you must talk to and work with an advisor who can understand your business and one who understands the IVA mechanism.
If you are speaking to such advisors or insolvency practitioners ask them how would they determine the repayment level. If they answer “you can write off most of your debts without worry” then this is not a good answer and may mean the advisor is not an appropriate person to deal with. If they say that you should pay back as much as possible in a short a term as possible” this may also be bad advice.
Ask yourself is this the right advisor to be working with?
As a rule of thumb however, the business and your own personal outgoings must be exceeded over a significant period of the IVA period by your profits. This excess (after allowing for future tax deductions) is used as the contribution to your creditors. But, remember seasonality and business shutdowns such as Christmas and ensure that the payments can be made in all periods of the year.
At soletrader-rescue.com we do not usually encourage IVAs that consider making lump-sum payments based on disposal of assets or a large sale or contractual payments. Such a payment is often far too difficult to quantify and forecast. It is important that the business makes modest ongoing payments on a basis of affordability rather than making promises about large lump payments that they may not able to keep. If the business or you personally are subsequently able to produce a larger amount of money, or windfall receipt, then the deal can be structured to allow the supervisor to ask for the larger payments in an achievable time scale.
Q: Say I am two years into the IVA and my business has changed significantly and I can’t keep up payments any more. What can I do?
A: This is a common question. It is rarely possible to forecast businesses accurately and the only thing that can be certain is that CHANGE is inevitable. If the proposal is built round a deal where payments are much too high, perhaps they were wrong in the first place, no matter, a revised deal can sometimes be struck provided the reasons are sensible and creditors agree. But, take care to offer to pay reasonable amounts in the first instance. If the business does become unviable then bankruptcy may be necessary if restructuring of the deal is not possible.
Q: I have heard you can write off up to 95 per cent of your debts?
A: This is not the aim of the Insolvency Act or the IVA mechanism. The IVA is designed to maximise creditors interests and avoid bankruptcy for the debtor. The deal should be structured to pay back the creditors as much as is possible over a period of time. If you are seeking to “stuff” the creditors: they will spot this.
Work up a solid, achievable proposal and if the business cannot afford to repay more than say 10 to 30 per cent and the creditors agree, then this is a deal. However, the ultimate aim should be to repay creditors 100 pence in the pound if at all possible. Be wary of people who seem to want you to hurt your creditors.
Q: What happens if a creditor votes against the deal?
A: See the detailed guides to voting in IVAs. But briefly, providing more than three-quarters of creditors who actually cast a vote, do vote in favour of the deal, the rejection of other creditors does not matter. They are legally bound by the majority decision. If you have any fears or concerns about this please feel free to talk to us on our freephone number above.
Q: What is an interim order?
A: See Guide to IVAs for fully detailed guide. Basically it protects the debtor while a deal is proposed, considered and a creditors meeting held to reach a decision on whether the deal is approved. It means that no creditors can take further legal action against the debtor (you) without leave of the court.
Q: I have heard the term moratorium used. What does this mean?
A: See guides to IVA for full details. Basically this is the same as the previous question. A moratorium is a protective mechanism used to ensure that the creditors, as a whole, have time to consider your proposals.
Q: My business is about to start making very good profits. Why not just do an informal deal with the creditors?
A: One must weigh up the advantages and disadvantages of an IVA and do the same for trading out and or refinancing. A word of warning. Do not be too optimistic and offer repayment deals that you cannot stick to?!
For example if you owe HMRC 10,000 and your business is forecast to make 15,000 over the next 12 months, by promising to pay the HMRC over 12 months you’re going to absorb more than 66% of your profits over that period just paying back that tax. Will this leave the business adequately capitalised?
Q: Wont creditors’ just reject the deal anyway – I haven’t paid them and they will be angry?
A: In almost all cases we have been be involved with, the easy answer is no. However some (usually smaller) creditors are intent on rejection out of anger, spite or just to see a competitor removed. Produce a quality, well-structured deal though and it will generally gain majority acceptance.
Q: I have had a visit from a bailiff or Sheriff what can I do?
A: If the creditors have asked them to visit they have clearly lost confidence in you and the ability to collect their money using conventional means. Consider using the IVA or bankruptcy now. Read the IVA guide and FAQs for bankruptcy and IVA FAQs. Also see legal actions guide.
What is a CVA? | Company Voluntary Arrangements Explained
A CVA or Company Voluntary Arrangement is a legally binding agreement with creditors allowing a proportion of debts to be paid back over time
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What Is A Winding Up Petition By HMRC or Other Creditor
A winding up petition is a legal notice put forward to the court by a creditor. The creditor petitions to the court if they are owed more than £750 and it has not been paid for more than 21 days. The application, in effect, asks the court to liquidate the company as they believe the company is insolvent.
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Notice of Intention To Appoint Administrators
A notice of intention to appoint administrators is when the company files a document to the court to outline that it intends to go into administration if a solution cannot be found to its immediate financial problems. It can be used as part of the pre-pack administration process as well as used to restructure a failing business to avoid its liquidation.
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What Does Going Into Administration Mean?
Going into administration is when a company becomes insolvent and is put under the control of Licensed Insolvency Practitioners. The directors and the secured lenders can appoint administrators through a court process in order to protect the company and their position as much as possible. Going Into Administration - A Simple Guide Administration is a very powerful process for gaining control when a company has serious cashflow problems, is insolvent and facing serious threats from creditors. The Court may appoint a licensed insolvency practitioner as administrator. This places a moratorium around the company and stops all legal actions.The administration must have a purpose and the Government encourages the use of company rescue mechanisms after administration. The 3 purposes (or objectives) of Administration Rescuing the company as a going concern. Company rescue as a going concern – this is usually a company voluntary arrangement. The company enters protective administration and is then restructured before entering into a CVA. The CVA would set out proposals for repayment of debts to secured, preferential and unsecured creditors. When the company has its CVA approved by creditors, then the administration process comes to an end after 28 days. Achieving a better result for the company's creditors This is as a whole than would be likely if the company was to be wound up (liquidation) See the differences between Administration and Liquidation. This better result is usually obtained by selling the BUSINESS as a going concern to one or more buyers. The company and the debts are “left behind”. The better result may include securing transfer or employees under TUPE, as well as selling goodwill, intellectual property and assets. Controlling and then selling property/debtors. This is called realising assets. Then the administrator makes a distribution to one or more secured or preferential creditors, in order of creditors priority. Usually the business ceases trading and employees are made redundant.Only if the first two options are deemed unattainable, can the administrator use this third option.Under the administration option, it is possible for the company and its directors (or a creditor like the bank) to apply to the court to put the company into administration through a streamlined process.However, the law requires that any finance provider (like a bank or lender), with the appropriate security, is contacted and the aims of the administration be discussed and approved. The finance provider must have a fixed and floating charge (usually under a debenture) and the charge holder will need to give permission for the process to go ahead. Five days clear notice is required. Be aware, though, that a secured lender can appoint administrators over a company without notice if it thinks its money is at risk. So communication with the secured lender is essential.
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What is Receivership?
Definition of Receivership Receivership, also known as administrative receivership, is a legally sanctioned procedure where an entity, typically a lender like a bank, appoints a receiver. The primary role of this receiver is to "receive" and liquidate the company's assets, if necessary, to repay the lender. This process is particularly beneficial to creditors as it aids in the recovery of defaulted funds, potentially preventing the company from facing liquidation. The introduction of a receivership simplifies the lender's task of securing owed funds in cases of borrower default.Receivership should not be confused with administration and a receiver can only be appointed by a holder of a qualifying floating charge created before September 2003. Changes to this procedure were brought in by The Enterprise Act 2002 which promoted company rescue and saving struggling businesses. Given the charge has to be almost 20 years old receiverships are now very rare with 2-3 only each year. Why would a company go into receivership?The company requires finance for its activities and borrows from a bank (or other secured lender). In consideration for providing the loan, the bank requires security. Normally the company will sign a debenture with a fixed and floating charge. This offers the bank security over the assets of the company. If the terms of the agreement are breached or the company does not conform to the bank's wishes, the charge holder can:Appoint investigating accountants to ascertain how secure or not the bank's debt is and determine the best route forward (not always receivership). Demand formal repayment of the loans without notice. Appoint a receiver to administer and receive the company's assets.The receiver has a duty to collect the bank's debts only,they are not generally concerned with the other unsecured creditors or shareholders' exposure.Receivership - A typical appointment Having borrowed against a business plan that has not worked, a company finds that it is suffering cashflow problems. In an effort to survive, the company reports its problems to the bank and the bank asks for more information on the problems the company faces. Struggling with the problems of firefighting, the directors find it difficult to produce the information. Often the accountancy and reporting systems are not robust and a lot of time is needed to work out where the company is going, what the depth of the problems is and the necessary reporting to the bank is delayed.As time goes by, the company's overdraft is constantly at its limit, because monies don't come in fast enough from customers. Clearly this should set alarm bells ringing at the company - it most certainly does at the bank. They call this ceiling borrowing, and take it as a sign that the directors are losing control. When this happens the bank will review the account and will typically take some or all of the following steps: What the Bank will doThe bank will ask for a reduction in its exposure. It will ask for increased security from the directors or shareholders. Usually this takes the form of personal guarantees to support the security that the company has given through the debenture. It may ask for new capital to be introduced by the shareholders. Problem is though, occasionally, this only has the effect of reducing the bank exposure as the bank takes this cash to reduce the borrowing. It can ask for a new business plan from the directors, along with regular reporting. It may ask for the company to consider receivables finance (factoring) to remove its borrowing and move to a factor. Often the bank's own factoring company. If they are still not satisfied that the directors are in control and if the bank is concerned about its exposure it will ask for investigating accountants (or reporting accountants) to look at the business. Normally this is a large firm of accountants who send an insolvency practitioner (IP) into the business to ascertain:Is the business viable? Is the company stable? Does it have a long term future if the present difficulties can be overcome? Is the bank's exposure sufficiently covered in the event of a failure? In this report the IP calculates what the assets of the business are worth on a going-concern basis and in a forced sale scenario (or closure basis). Investigating accountants often recommend that the bank sticks with the business, but that the bank should limit any further borrowing to the fully secured variety - in other words the directors must secure it personally against property for example. If the IP thinks that the company is in serious risk of failure and that the banks may lose money in that event, he/she will usually recommend to the bank that they appoint a receiver or administrator. Usually the bank (bizarrely) requires the directors to "request the bank to appoint a receiver". This is face-saving, and designed to deflect criticism from the bank to the directors.At Company Rescue, we believe that it is wrong that the insolvency practitioner that carries out the investigation could also be the receiver - We think it is essential that his/her role as investigating accountant is limited to just that. However, fortunately most banks now agree that this is not a good approach. Once they are appointed what is the receiver's role and powers?A receiver will quickly ascertain what the prospects for business are and decide whether to sell some or all of the assets, the business as a whole, or to continue to trade whilst a better deal can be achieved. Because of the rules and case law, he may wish to get rid of the assets and staff as soon as possible. (They will have to adopt employment contracts 14 days after the appointment). They may remove directors and employees without impunity. They ultimately decides the way forward and will (often) not take advice from the directors. They must pay the preferential debts (employees claims for arrears of pay and holiday pay) first from any floating charge collections. If a deal is to be done with directors the receiver must first advertise the business and its assets for sale. They must conform to the tight rules and regulations governing receivership and report to the DBEIS. A receiver must investigate the conduct of the directors of the business and file a report with the DBEIS.Disadvantages of Receivership The company is rarely saved in its existing form. Its assets will be subject to "meltdown" ( most people know that in receivership or liquidation assets are sold at a knock down price), often jobs and economic activity are lost.The directors will typically lose their employment and any monies the company is due to them, and the company may cease to trade. In addition the director's conduct is investigated.From the creditors' perspective, it is unlikely that any unsecured creditors will receive any of their money back and often they lose a valuable customer. Clearly the cost of receivership can be very high and the bank has to underwrite the receiver's costs. Advantages of Receivership The bank can take control where directors have maybe lost control. The receiver also has power to act to save the business quickly. The bank can ensure that its exposure is (at least) not increased and hopefully recover all of its money. For directors, the advantages are that it mitigates the risk of wrongful trading and may crystallise a very difficult position allowing them to get on with their lives.Preferential creditors may see their debts repaid by the receiver.Still got questions? Click here for Receivership FAQs. If there are still unanswered questions contact us by email or call 08009700539.If your business is in trouble and the relationship with the bank is breaking down, we suggest that you look carefully at the guides in this site. Receivership may be an option. Work out the viability of the business - can you trim costs? Work out the problems, set out the position and have a meeting of directors. Decide if the business can continue but needs to be restructured or if just not viable then consider administration or if the company's lenders have a debenture pre-dating 2003 then receivership. These questions and answers will give more detailed background to the Administrative Receivership technique. If you have any further general or specific questions email us or complete the contact form. Q: How does it happen? A: Receivership can happen very quickly once the bank loses faith in the directors. The best policy is to work with the bank and produce a survival plan having taken professional and expert advice. Q: But the bank can't just appoint a receiver can they? A: Yes - read the terms of the debenture closely - you will be surprised how little power you have to prevent it. In truth the bank will generally have exhausted all possible avenues to help to try to preserve the business. If the directors are manifestly not up to the job or will not listen, will not take professional advice, they will lose patience quickly. Q: Can we stop them? A: Not normally. However if you talk to an experienced turnaround practitioner they can often persuade the bank that their involvement will lead to a review of viability followed by a professional recovery plan and the bank will usually give time for this to happen (within strict financial constraints) Q: How can we avoid receivership? A: Follow the guidance on this site. Discuss the problems with your key people. What caused them and how you can get round them. Build a plan for survival. Discuss this clearly with the bank. If in doubt about the correct route speak to a turnaround practitioner or a quality insolvency practitioner who lists rescue and recovery as a specialty. Be warned most are still looking for liquidations and receiverships (undertakers)If the bank wants to put investigating accountants in; wait until you have a built workable plan and then sell this HARD - to the investigating accountant.Above all demonstrate a professional and determined approach to saving a viable business - procrastinate at your peril - the bank will not wait for that silver lining. Q: I have heard that receivership is a rescue procedure - please explain? A: Many insolvency practitioners describe selling the business or its assets to a third party out of receivership as a rescue technique. Although some part of the activity may remain I cannot understand how the loss of almost all creditors' monies, jobs and all shareholders' funds, followed by the liquidation of the company, can be described as a rescue! Q: What happens if the receiver does not get the banks money back in full? A: He/she may rely upon the banks other securities. Obviously if the directors, shareholders or even a third party has signed a personal guarantee to pay money to the bank in the event of a failure to recover its loans, then the receiver pursues this as if it were an asset of the company. The receiver may also look at the possibility of legal actions against the officers of the company or debtors or creditors to recover funds Q: What happens to my personal guarantees in receivership? A: Unless the receiver recovers all loans due the bank after his/her fees (and any payments due to preferential creditors) then your PG will crystallise. In other words the receiver may seek to recover money from you. Q: What happens to the employees? A: This is a complex question that cannot be answered without a great deal of information. If the business is sold in a reasonable time then their employment rights can be continued with the new owners (under TUPE). If the receiver makes them redundant straight away they can claim for payments from the government (subject to a maximum amount). Again this is a complex question - email us if you want more detail.Please call us on 020 7887 2667 (London) or 08009700539 to talk to an expert turnaround advisor if you would like to talk through your company's options.
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