Solution
Robert answered on
Dec 21 2021
1. “The moratorium is the most powerful tool for a company in difficulties. However a fair balance
must be achieved between the protection of the company and the protection of the interests of
creditors, in particular secured creditors.”
Discuss.
Answer: Moratorium is a concept 1 and a powerful tool, which is being used by companies when they
have tight cash flows and also difficult times in terms of business establishment, company internal
problems etc. In difficult times, the company tries to protect its interest and wants to continue its
existence forever. But there is always a threat from the creditors, which may lead to liquidation of the
company. It has been observed over the years, the companies who have a good business but poor cash
flows, there is a solution which will balance the protection of the company and the protection of the
interest of secured creditors. The threat may be, if the payments which are due to the secured creditors
are not paid, and then the liquidation of assets may be very certain. In such a scenario, the company will
lose its existence. In order to
ing in a control on the situation properly, the company may go for
Company Voluntary A
angement (CVA)2. As per the law of the land, Company Voluntary A
angement
(CAV) is agreed and accepted among the company and the creditors, which is legally enforceable. After
going for signing the documents with the creditors, the company could able to stop the pressure from
the creditors and turnaround its’ business.
Precisely, CVAs are the a
angements made between an insolvent company and its creditors
(unsecured, trade and tax), which helps the company to go for a moratorium. Hence the creditors may
not attack the company to make the payment and the company gets the opportunity to make the
payment from the future profits as agreed upon the terms and conditions accepted by both the parties.
Majorly this kind of deal gets executed, considering the company preservation, restoring sales and
profits, paying back over debt to creditors over a period of time. As per the CVA, the directors are in
control and hence there are opportunities that the business will bounce back and revival of the same
will be established soon. In U.K. as per the government regime, the companies which are of this kind I,e
on the verge of insolvency , are encouraged to go for CVA. Generally the CAV is proposed by the
directors of the company.
1
As per moratorium, all the payments supposed to be made to be suspended for certain period of time.
2
Company Voluntary A
angement is known as CVA. As per this, the company goes for an agreement with creditor
to protect its interest.
Steps Involved In CVA Measurement:
When the company does propose for Company Voluntary A
angement, following are the steps need to
analyze initially and then need to be proposed for CVA:
- The business model of the company and wherever the company has the presence of operating
the business.
- How does the industry pertain to the company’s business model , performing at the time of the
proposing the CVA and going forward what are the prospects of the industry and how the
government looks this industry.
- What are the fixed assets and cu
ent assets of the company and details of the assets along with
an approximate value of the assets. Out of all the fixed assets, we should also understand how
many are charged to lenders and how many are freehold. In the similar way, we should
understand the approximate value of the cu
ent assets like stocks, debtors, work in progress
with the help of stocks, cash etc. While looking at the debtors, we need to understand the age
of the debtors and how much of them, are going bad in the collection.
- While looking at the liabilities, we need to find the amount of liabilities and the nature of the
liabilities I,e which are the liabilities need to be cleared immediately and which are the liabilities
can be defe
ed as per the nature of liability while availing it. To quote with an example, some of
the liabilities will be pertained to directors, which need not take immediately. We need to
attend the liabilities, the company owe to other lenders like banks / financial institutions
immediately.
- The management team expertise in the line of business and how dynamic they are as the
usiness environment keep changing from time to time. This becomes very vital part of
considering the CVA. Are there any different opinions among the board of directors?
The post is analyzing the above details, it is advisable to go for CVA. Here as per the law , the directors
appoint the advisors while going for CVA. The assessment of CVA in the form of moratorium is very
important because, if the same regulated and assessed properly, then it would be difficult to approach
the creditors.
In case of insolvency of the company, as per the UK Insolvency Act 1986...