Updated: 1st July 2021
A Company Voluntary Arrangement, or CVA, is a formal restructuring process for eligible companies experiencing significant decline. Companies wishing to enter this arrangement must be deemed viable for the future.
A licensed insolvency practitioner (IP) determines whether the company is insolvent, or contingently insolvent, which is another condition for acceptance. They’ll also ensure the business can afford to repay the CVA over its full term.
Given that the business may need to reduce its costs and become more streamlined to meet its new financial obligations, employees can be adversely affected in a CVA. Staff costs can represent a significant proportion of a business’ expenses, so ending employment contracts will be inevitable in some cases.
So how exactly do CVAs affect employees, and are members of staff automatically made redundant as a result of the company’s insolvent position?
Employees aren’t automatically made redundant when their employer enters into a CVA. In fact, the company may need to rely on its members of staff to ensure the business runs smoothly, and increase the chances of making repayments for the full CVA term.
If redundancies cannot be avoided, however, the company must follow statutory process to ensure they are fair and legal. The consultation process laid down in employment law must be followed without exception, for example.
Any dismissals deemed to be unfair can result in sizeable claims for compensation. This can jeopardise the success of a CVA as claims become unsecured debts within the arrangement, potentially introducing further financial uncertainty for the company.
On the other hand, rather than making redundancies, the company may be able to retain staff if they can amend their employment contracts. Again, careful adherence to employment laws is paramount here, with all the necessary consultation procedures being made in relation to any changes in working hours or other terms.
Employees who are made redundant as a result of a Company Voluntary Arrangement can claim redundancy pay and other entitlements if they’ve worked continuously for the company for a minimum of two years.
They may be eligible for the following payments:
Payments are made by the Redundancy Payment Office (RPO), which then becomes a creditor of the company and is repaid as part of the CVA. This helps the company spread the cost of redundancies over the full term, which typically lasts between two and five years.
The amount of redundancy pay employees can receive depends on individual circumstances. The elements that make up the calculation for redundancy pay are an employee’s age, current salary, and length of service.
The government has capped the monthly wage at £544 for the purposes of calculating redundancy pay, and the total amount of redundancy pay is capped at £16,320 for 2021/22. Additionally, length of service is calculated only in complete years.
Redundancy pay can be made up of various elements, including Notice Pay and arrears of wages, in addition to the main statutory payment. Up to £30,000 is tax free and also free of National Insurance.
It’s crucial to obtain professional insolvency advice early on if you have employees and your business is experiencing financial distress. Acting quickly can open up significantly more options, and help to prevent a slide into insolvency.
Real Business Rescue are Company Voluntary Arrangement experts, and will provide reliable independent advice on your current situation. Please contact one of the team to arrange a free, same-day consultation – we operate an extensive network of offices throughout the UK.