INS10161 - Introduction to Voluntary Arrangements

Advantages and disadvantages of VAs for the business

Introduction

Few forms of business rescue favour ordinary creditors or have a high success rate

• Receivership favours only secured creditors
• Liquidation drives down asset values and has high DTI costs
• Administrations can have high IP costs and prohibits recovery of even post administration debt
• Section 425 schemes are more for company reconstruction and not very creditor friendly.

The Insolvency Act 1986 introduced individual and company voluntary arrangements. The Insolvent Partnerships Orders 1986 and 1994 later brought partnerships (see INS9581) into VAs. They are treated much like companies.

Not all VAs are concerned with business rescue. Many involve consumer or credit card debt, or a debtor may decide they have no business acumen and would be better off as an employee.

Advantages

When a failing business is potentially viable a VA is often the best overall option as

• it is an informal alternative to individual bankruptcy or compulsory liquidation
• it allows a professional person to continue to practise and to earn higher income
• it allows the debtor to retain assets essential to the business and control subject to remote supervision
• non-essential assets are realised for the benefit of creditors
• the business has the potential to improve its efficiency and profitability, to contribute to a voluntary arrangement fund and to pay post approval taxes to HMRC
• both debtor and creditors are secured by a binding debt compromise agreement
• the debtor has fixed but achievable obligations to the VA creditors, stability and supportive creditors
• the creditors should have a compliant co-operative debtor and can usually expect less than their whole debt but considerably more than formal bankruptcy or liquidation would provide
• even if the arrangement fails creditors could recover more during the VA than in bankruptcy or winding up
• if the arrangement fails (50% do) the agreement provides for bankruptcy or liquidation.

Main advantages for ordinary creditors are

• Creditors are likely to receive more than in liquidation or bankruptcy
• The costs may be lower
• Funds on deposit may generate interest at a higher rate
• Capital Gains Tax losses are available against disposals.

Advantages for directors in Company Voluntary Arrangements are

• The supervisor cannot take action for misfeasance or wrongful trading
• There is no disqualification return
• They retain control of the company
• The company's position does not have to be advertised on its letterhead but it is recorded at Companies House.

(But some of the advantages for directors might be considered disadvantages from the creditors' point of view.)

Disadvantages

• The supervisor has no power to claw back preferences and transactions at undervalue Challengeable transactions should be disclosed in the proposal and if omitted are grounds for application to revoke approval of the VA.
• Conditions can be imposed on minority creditors by more than 75% of those creditors attending or represented at the creditors’ meeting.
• Lack of detail in the legislation leaves many things uncertain
• There is scope for abuse by the unscrupulous, as the procedure is not under the direct supervision of the Courts.

VAS and the rescue culture

HMRC supports the Rescue Culture and VAs generally when this is consistent with their overall objectives of optimising yields and protecting the tax base ( INS10163)

• the business may survive as a going concern
• jobs may be saved
• stimulates enterprise
• ultimately minimises loss to the Crown and benefits the wider community.