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How A Voluntarty Arrangement Can Help A Struggling Business

Under British law a voluntary arrangement is a formal agreement between a debtor and their creditors (the people/businesses they owe money to), and as such they can be powerful business debt help solutions.

Voluntary arrangements come in one of three variations:

Individual Voluntary Arrangements, or IVA’s are suitable for people who has a large volume of liabilities that they cannot keep up payments on (more than fifteen thousand pounds) and as such they are suitable for sole traders, as well as individual partners of a partnership or directors of a Ltd company, as well as individuals with personal liabilities.

A Partnership Voluntary Arrangement, is for businesses that are partnerships, and will cover all unsecured debt that the partnership owes, if there are no personal guarantees, or debts that the individual partners are themselves personally liable for then they as individuals are unaffected by the agreement as it covers only the liabilities of the organisation itself (as debtor) . That being said it is often case that the individual partners have had to give personal guarantees on the partnership’s liabilities and therefore it is common for an IVA to be setup alongside a Partnership Voluntary Arrangement.

Company Voluntary Arrangements, are for companies, and work much in the same way as an Individual Voluntary Arrangement or PVA but are based on an agreement between the business and its lenders on debts the business is liable for. Again it is often the case that the individual directors have had to give a personal guarantee on the business’ debt and as such an IVA may be arranged simultaneously with a CVA.

Voluntary arrangements are designed to last for 5 years, and over the period the subject of the voluntary arrangement can be granted an element of debt forgiveness based on what they can afford to repay, and at the end of the voluntary arrangement, as long as they have kept to the terms of the agreement, the outstanding amounts will be cleared.

Voluntary arrangements are all governed by the Insolvency Act therefore they need to be drawn up, and managed by an Insolvency Practitioner (IP), with whom responsibility lies to ensure the creditors are provided with all the necessary information in order for them to be able to agree the voluntary arrangement. For example all the relevant circumstances, reasons for being unable to meet their liabilities, and to detail where the creditor will stand if the arrangement is agreed as apposed to another form of action e.g. administration, liquidation or bankruptcy.

In the vast majority of circumstances a voluntary arrangement will be the best option for the creditors, in terms of the amount of return on the debt that they will realise if the arrangement is completed, and therefore an IVA, PVA or CVA is not always the best course of action for the business, or individual that is the debtor.

The main attraction of a voluntary arrangement is that, whilst it still provides the debtor an element of debt forgiveness, and legal protection from creditors it remains a private process between them and their creditors, so it is not made public. As such employers do not need to be notified, there are no any restrictions on the professional status of an individual, and businesses can continue operating.

Once appointed the IP will liaise with their client to produce a full financial statement , and take responsibility for liaising with the creditors. It is up to the IP to get consent from at least seventy five percent of the creditors for an arrangement to be able to proceed. It goes without saying that creditors are going to want to know valid reasons for the subject of the arrangement no longer being able to meet their contractual payments, and have reasonable confidence that a voluntary arrangement will be adhered to and run its full course.

That being said, a voluntary arrangement could be the most suitable option if your business has: Suffered from a bad debt Looses a major client, or contract Requires time to reorganise in order to continue to be viable Is receiving significant pressure from tax authorities The business leadership recognises mistakes that have been made in the past, and have identified how to do things better but require the time to turn things around

For a limited company there are a number of additional constraints on the size of the company in order for it to qualify, voluntary arrangements are primarily designed for helping individuals or small to medium sized businesses. Therefore a business entering into a voluntary arrangement will need to have less than 50 employees, a turnover of under £5million and be without significant assets.

If a debtor fails to meet their contactual obligations of the arrangement they will face formal bankruptcy, and this is one area for criticism from the Insolvency industry, with many professionals claiming that the terms of the arrangement should allow for some discretion if the debtor has a short term setback, but the arrangement still has a good chance of being successful.