9th November 2021
A Company Voluntary Arrangement (CVA) is a formal insolvency procedure which provides the opportunity to rescue a financially distressed company through a process of restructuring its debts and reorganising its operating structure. Non-performing elements of the business can be shut down, while negotiations with creditors can lead to reduced monthly outgoings, as well as the opportunity to revisit onerous leases agreements and other burdensome contracts.
In some more complex cases, a CVA on its own is not enough to fully address the company’s concerns while also satisfying both shareholders and creditors. In these instances, it may be possible to employ a method known as ‘hiving’ as part of the CVA.
An asset of the business, such as intellectual property, or the whole business itself, can be sold to a newly formed subsidiary of the company. As a newly formed entity, this subsidiary will have no debts or liabilities to contend with, however, nor will it have any credit history, something which could make obtaining outside finance to fund the purchase of the assets a challenge.
In this case it may be possible for payment to be made by way of shares in the newly formed subsidiary. On the plus side, however, no credit history is often better than the chequered credit record of a company which has entered into a CVA.
The original company now has very little in the way of assets, except for the shares it holds in the new subsidiary. It can enter a CVA, under the supervision of a licensed insolvency practitioner, and pay back outstanding creditors an agreed amount over a typical term of three to five years. The CVA supervisor (which will be the appointed insolvency practitioner) will take a charge over the shares of the subsidiary for the term of the CVA.
Once the CVA has successfully completed, with all contractual payments having been made in full, the original company may then be liquidated should it serve no further use for the shareholders; the shares of the subsidiary held by the original company may then be sold back. Alternatively, the company can remain active should shareholders wish.
This process requires extreme care as doing this incorrectly could be construed as a transaction at undervalue which represents a serious breach of the Insolvency Act 1986 and comes with serious consequences for company directors. It is therefore imperative that you contact a licensed insolvency practitioner for expert help and advice before any company assets are moved or sold.
Not only will an insolvency practitioner be able to ensure everything is done within full compliance of the Insolvency Act 1986, but they will also be able to advise you of any alternative processes which may be more beneficial to your company and its creditors such as administration, or pre-pack administration.
When your company is experiencing financial distress, timely expert advice is paramount and can be the difference between your company surviving or succumbing to the mounting pressures.
If you are considering hiving as part of a proposed CVA you must remember that, as insolvency practitioners, we are not able to provide tax advice, so you must be sure to discuss any tax implications of this process with your accountant beforehand.
Real Business Rescue provide expert help and advice to shareholders and directors of insolvent and financially distressed companies from a network of over 100 offices located up and down the country. You can arrange a free and completely confidential consultation at any one of our offices by calling our director advice line on 0800 644 6080.