R3 Association of Business Recovery Professionals has launched a standard form proposal for company voluntary arrangements.
Research carried out back in 2018 suggested a need for the introduction of a standard form to help businesses save vital time and expense when applying for a CVA, and in light of the COVID-19 pandemic, the form has been rolled out to help small and medium sized businesses who are struggling.
But how does the CVA standard form work? How does it change the CVA process? And is it suitable for your business? Read on to find out everything you need to know...
Here’s how the new CVA standard form can help you turn your business around
The lowdown on CVAs
Before looking at the standard form, we first need to look at how the CVA process works. A company voluntary arrangement is a contractual agreement between a company and its creditors under the Insolvency Act 1986.
It essentially allows a company in financial distress to come to an arrangement with its creditors whereby they pay back a proportion of their debt over an agreed period of time whilst continuing to trade. Once the time is up, the rest of the debt is written off.
Companies can only arrange a CVA through an insolvency practitioner, and it must be approved by 75% of creditors.
So, what is the R3 standard form?
The R3 CVA standard form was developed as a result of the COVID-19 pandemic for companies who need some extra time to get their businesses fully operational due to the impact of coronavirus.
Essentially, it was designed to provide additional relief to small businesses and encourage a responsible approach to corporate debts. It does this by making it easier for businesses affected by the pandemic to enter into a CVA by providing a foundation for directors’ proposals to be developed.
CVAs have previously been thought of as too costly and complicated for small businesses, and it is hoped that the R3 form will help to save them valuable time and money, and make it easier for SMEs to access a CVA.
In addition, the form also has a number of provisions to assist SMEs throughout the pandemic too.
Key features of the standard form
The R3 standard form aims to make CVAs more accessible and more flexible by the introduction of six key features:
- A period of breathing space which allows the business time to restructure without fear of action from their creditors.
- A delayed period for full payment of the company’s debts in line with the CVA to commence once the breathing space period has elapsed.
- No set periods for the payment have been determined, so the company and creditors can negotiate between themselves.
- An introductory period of up to three months for businesses who haven’t yet resumed trading as a result of the pandemic.
- The possibility to temporarily halt payments if the business is in local lockdown.
- The ability to seek further decisions if more changes become necessary due to the pandemic.
Advantages and disadvantages
There are a number of advantages to the new CVA standard form.
For starters, it can also be used in conjunction with the new moratorium for businesses introduced by the Corporate Insolvency and Governance Act 2020, and whilst CVAs are typically only able to be arranged through an insolvency practitioner, the R3 Standard Form makes them much more accessible.
What’s more, the additional support measures to help businesses continue to trade during the pandemic will undoubtedly be a huge relief for businesses in this challenging time.
However, it’s important to note that the standard form is not one size fits all, and although it is designed to make CVAs more accessible, it isn’t intended to replace professional advice, and companies should still seek an expert opinion to decide whether or not it is the right option.
Finally, it should also be noted that HMRC fell into the definition of “secondary preferential creditors” on 1 December 2020 under the Finance Act 2020. This means that if a company owes a large debt to HMRC, then any proposed CVA might not be appropriate.
How McAlister & Co can help
If your company is facing financial difficulty as a result of the COVID-19 pandemic, the sooner you seek advice, the better.
At McAlister & Co, we are business turnaround specialists and can provide expert help and support to help you rescue your business - so contact us today for FREE confidential advice.