When a company does not have the cash to pay its debts when they are due, the situation can develop rapidly towards severe financial consequences. Directors should take action as soon as possible, and contact an expert for advice. This is essential, as insolvency experts like those at Company Insolvency Advice may be aware of solutions that can grant businesses more time to repay their debts, and help them to avoid the challenges of liquidation that might otherwise arise.
When directors find their business in a difficult financial position, it may be possible to negotiate with creditors to secure more beneficial payment terms, or to have an expert negotiate on their behalf. There are also legal procedures available through which businesses can gain the time they need to reorganise and repay outstanding debts. Here, we will outline these processes and explain how you can determine which approach is right for you, as this depends on the nature of your organisation’s debts and its creditors.
How can businesses get more favourable payment terms?
There are two primary legal agreements businesses can use to secure new payment terms with creditors, both of which involve paying the debt in instalments over a particular period of time, all of which must be agreed upon in advance. The two types of arrangement are as follows:
● Company Voluntary Arrangements, which are suitable for general business debts
● Time to Pay Arrangements, which are designed for tax debts to HMRC specifically
Once in place, these agreements will both immediately halt any legal action that is in progress against you and stop creditors from taking further action, provided you meet the requirements you have agreed to.
The application process for Time to Pay Arrangements is different from Company Voluntary Arrangements, but you must obtain the authorisation of your creditor before any agreement can be put into effect in either case. As a result, it is generally best to enlist the help of an experienced insolvency practitioner or advisor when making the necessary proposal. This will help to make sure that your submission is fair to all parties involved, and provide you with the best chances of success.
What Is a Company Voluntary Arrangement (CVA)?
A Company Voluntary Arrangement may apply to a wide variety of corporate debts. It requires you to put together a proposal, in which you identify the maximum amount that your business can afford to pay in monthly instalments, as well as a payment period over which you will fully clear the debt.
It is important that you make a proposal that is realistic for your business, to ensure you can make the necessary payments on schedule – while the CVA will cease any legal action against your business, this will only apply for as long as you keep making your payments, and if you fail to do so, your creditor can revert to legal means to reclaim the money you owe.
At the same time, you will need your creditor to approve the CVA for it to go ahead. As such, it is important that you propose a payment schedule that is fair to all parties. If you are able to do so, you will have the best possible chance of clearing your debt.
There are strong incentives for your creditor to agree to the proposal, provided it is fair and reasonable. Their other options for reclaiming the debt will often involve forcing your business to close, which may mean them losing an otherwise valuable customer. What is more, they will receive a dividend following the closure of your business that may not cover the full amount of the debt. As such, a CVA, which guarantees the repayment of the full amount owed, is a preferable option.
What Is a Time to Pay Arrangement?
A Time to Pay Arrangement is similar to a CVA, but applies specifically to tax debts owed to HMRC. It works in the same way as a CVA, meaning that you must create a proposal and submit it to the tax authority. If they decide to grant the proposal, you can then pay the money you owe in instalments over a period of time, per the terms of the agreement.
As with a CVA, it is up to your creditor whether or not to agree to the proposal. In all cases, it is best to work with an expert advisor to help you to prepare your proposal. Without support from an experienced financial advisor and corporate debt expert, it is difficult to strike the right balance in your proposal such that HMRC will approve the Time to Pay Arrangement. It may also be challenging to calculate a repayment amount that is fair to your creditor, but which you can also be certain that your business will be able to afford.
Ultimately, by seeking professional advice and discussing your options, you may be able to secure a Time to Pay Arrangement or CVA that will help your business to pay off its debt and recover financially during the same period. You can also benefit from advice on how to improve cash flow and avoid future financial challenges, or guidance on securing new finance that can enable your business to grow.
by Robert Cooksey, Director, Company Insolvency Advice
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