There might be instances where the executives of a failing company need to take stock. Also, assess their situation, and seek to find a realistic alternative that can help bring their organization back from the brink. The sooner an insolvency remedy is found, the lower the company liquidation risk.
When you can’t seem to meet your expenses, and the creditor burden is too much to bear, there are several informal and formal insolvency options available. Typically speaking, professional assistance from an experienced team of restructuring professionals can contribute to a more favourable outcome for your company. Such action is better than trying to negotiate individually with creditors. However, certain situations may occur where an informal agreement may be better for your business.
What is an Informal Insolvency Arrangement (IA)?
When you encounter a situation where a single creditor owes a nominal debt, it might be worth pursuing the debt informally. An informal agreement generally includes you calling creditors and describing the difficulties in paying in monthly instalments to pay them. Getting this down on paper in a structured way will show serious purpose and give them a sense of trust that they can ultimately get their money back.
Is it an informal arrangement appropriate for my business?
Informal arrangements usually last no longer than 24 months due to their nature. Therefore, they generally suit companies with short-term cash flow problems and a relatively small number of creditors.
Unlike voluntary arrangements, interest and charges are not stopped during an informal arrangement unless agreed with individual creditors. For example, while HMRC may be willing to accept an informal agreement, it won’t stop adding interest on your debt, so the debt and interest will have to be repaid.
Informal Creditor Arrangements – Issues:
The issue with informal agreements is the lack of a contract that legally binds creditors to their understanding. Such action means that the creditor can easily withdraw from the arrangement at any time to take legal action against your company, leaving you entirely unprotected.
It’s also the case that the investors are far less likely to consider a new deal independently. Written, suggested, and approved settlements by a licensed insolvency attorney have high chances to be approved.
Formal Insolvency Arrangements
Experts claim that Formal Insolvency arrangements are safer and more effective than informal resolutions thanks to the protection they provide from legal action. Once the agreement has come to action, as long as you adhere to the terms of the arrangement, there will be no further creditor contact.
There are also benefits associated with the terms of the arrangements. Insolvency practitioners are well equipped when it comes to negotiating financial terms and detailing how their proposal is in the best interests of creditors. Such a move is precisely why formally drafted suggestions are more likely to be accepted on the first time of asking, and often with more favourable terms.
When does Company Voluntary arrangement come into effect?
A CVA comes into action at the time when the company’s creditors approve a CVA proposal made in respect to the company. However, it is ordinary for the CVA documentation to specify a different date from which its provisions apply.
A proposed CVA is considered and voted on by the company’s creditors by way of one of several permitted procedures, which include email, correspondence and internet meetings. A CVA cannot, however, be approved by deemed consent (section 3(3), Insolvency Act 1986 (IA 1986).
The approval by the creditors of the company of a CVA proposal requires a vote in favour of at least 75% of the creditors who vote on it. Another condition is that no more than 50% (by value) of any creditors who vote against the proposal (or modify it) are creditors who are unconnected to the company.
What effect does a CVA have on creditors?
Once accepted, the CVA binds all of a company’s unsecured creditors who had the right to vote on the CVA proposal. That means a CVA is binding due to the following:
- Lenders who have voted against the CVA
- Creditors who obtained notification of the resolution from the CVA but who did not participate
- Creditors who would have had the right to vote but were not notified of the CVA proposal, despite being entitled to be informed of it.
When bound by a CVA, a creditor is forbidden from taking action against the company prohibited by the CVA terms. Such provisions will usually be drawn up to preclude the borrower from retrieving any debt that falls beyond the scope of the CVA, rather than by a negotiated process laid down in the CVA.
Conclusion: If your business needs consultation, you need to decide on the type of arrangements. If you are considering company voluntary arrangement, you need to look out for expert advice for the same.