A Company Voluntary Arrangement (CVA) is used to reduce unsecured debt payments. Even HMRC debt can be included if the proposal is reasonable. However there are some debts which cannot be reduced with a CVA.
- The debts that can be included in a CVA
- Can HMRC debts be included?
- Will the bank agree to a CVA?
- Which debts must be left out?
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The debts included in a CVA
A CVA can be used to reduce the payments of unsecured debts. These are debts where assets owned by the company will not be repossessed if they are not paid in full. They include but are not limited to the following:
– Bank loans
– Company credit cards
– Outstanding debts to suppliers
– HMRC debts
– Outstanding Lease Agreements
Outstanding lease agreements can be included in a CVA. This is particularly useful if the company no longer requires a premises with an outstanding lease or existing lease payments are unsustainable.
A Landlord’s claim is normally restricted to 12 months rent and only 1 dilapidations claim. There is various case law that supports this (Re: Newlands Seaford Educational Trust).
Can HMRC debt be included in a CVA?
HMRC debt such as VAT, PAYE and tax arrears can be included in a CVA. This is because these debts are unsecured. If the amounts owed are large HMRC will normally be required to support the proposal. However there is no reason why they will not do so if it is reasonable.
Open communication with HMRC is critical during the proposal process. This will be the responsibility of the Insolvency Practitioner (IP).
One of the advantages of the Arrangement from HMRCs point of view is that it will be managed by the IP. This gives increased confidence that the best return will be generated.
There have been high profile cases where HMRC has not supported a CVA. One of these was Rangers Football Club. However this case was a specific instance where Rangers had not been properly run as a business. Forcing it into Pre Pack Liquidation was a way for HMRC to force a further investigation of the director’s conduct.
Will the Bank agree to a CVA?
Generally speaking the bank will want to support a CVA proposal. The Arrangement will improve company cash flow. In turn this will reduce future reliance on credit. In addition it reduces the risk that other creditors will force the company into liquidation. Such action could result in even larger losses for the bank.
If it senses that a company is in trouble the bank will usually want to avoid appointing an administrator. If it does so this could lead to a reduction in the value of the company’s assets. Then even greater bank loss.
The bank will therefore normally recognise that an CVA presents the best opportunity to recover its debts. However as with HMRC it will need to be kept informed during the proposal process.
Which Debts cannot be included in a CVA?
Secured debts cannot be included in a CVA. These include any mortgage the company has on a property. In addition Hire Purchase agreements. These debts must continue to be paid or the goods will be repossessed. Provision will be made for this in the company’s cash flow forecast.
An HP agreement can be included in the Arrangement if the associated goods are no longer required. Once payments stop the supplier will repossess and sell the goods. Any shortfall subsequently demanded is then unsecured. It can therefore be included.
Depending on the circumstances it may be possible to leave one or more unsecured debts out of the Arrangement. This may be required if it is necessary to pay a particularly critical creditor in full. However this omission would have to be highlighted in the proposal. The other creditors may then raise objections.