Entering into a Partnership Voluntary Arrangement can be an effective way for struggling business partnerships to repay their debts and continue trading despite financial hardships.
A Partnership Voluntary Arrangement, or PVA, is an agreement between business partners and their creditors to repay money owed over a set period of time. For partnerships that have failed to meet repayment obligations, it’s an important procedure that can help them to avoid insolvency and regain profitability in the future.
While a PVA is a proven and effective insolvency practice, it’s not always the most appropriate option for partners to take. Each partnership has its own specific financial and operational circumstances, so it’s important that partners consult a licensed insolvency practitioner for expert advice before entering into arrangements with their creditors.
Irwin Insolvency has an expert professional team on hand to help you make the best possible decisions in times of financial trouble. With over two decades of experience working in the insolvency field, our team are licensed to provide a range of insolvency solutions, including Partnership Voluntary Arrangements.
A Partnership Voluntary Arrangement is a legal agreement made between business partners and their creditors. It’s a formal process that can be initiated when a partnership is facing insolvency and is no longer able to pay the debts it owes to its creditors.
Importantly, a PVA is a voluntary agreement. It gives partners an opportunity to restructure or reorganise their business while retaining overall control of it. A PVA will halt interest and payment charges while setting down a required period of repayments that allows creditors to recoup their losses and any money owed to them by the partners.
A PVA gives the partners breathing room if they face insolvency due to a decrease in sales, unexpected economic instability, or any other reason that may adversely affect trading. It’s an effective way for partners to avoid winding down their business and entering into liquidation to pay their debts. For creditors, a PVA is a more sustainable way to regain the money owed to them, rather than forcing a partnership into liquidation.
A PVA is almost identical in substance to a CVA, or Company Voluntary Arrangement. They work in similar ways and are based on the same framework and principles. The difference is that whereas a CVA is an agreement between a company and its creditors implemented by the company directors, a PVA is an agreement between a partnership and its creditors implemented by the partners.
A PVA is enacted voluntarily by the partners of a business. Business partnerships exist when individuals share personal responsibility and liability for a business, but have not created a limited company to do so. Although note that a limited company can be a partner in a business.
For practical purposes, individuals in a partnership have a shared stake in the business. This means that partners not only take a share of the profits, but can be held personally liable for paying their debts. If a partnership becomes insolvent and can no longer pay its debts, they may approach their creditors and create a repayment agreement in the form of a PVA.
A PVA is a legal document and all parties involved must adhere to the rules that are laid down. Specifics will be established with the guidance of an insolvency practitioner, such as Irwin Insolvency. Once signed, a PVA ensures that creditors are no longer allowed to chase payments or apply pressure to the partners outside of the terms of the agreement.
A PVA allows the partners to reschedule payments and establish a new timeframe for repayments. Some debts may be wiped out, at the discretion of the creditors. Interest and repayment charges will be halted completely, and the insolvency practitioner will often set up a trust that allows the partners to make one payment each month, rather than paying individual creditors. While a PVA is active, the partners cannot be forcibly liquidated and will continue to trade as long as they adhere to the arrangement.
A PVA can only be formally instigated by an insolvency practitioner, who then has responsibility for ensuring that the partners stick to the agreements established in the document.
Here are the major benefits of a PVA for partners and creditors:
A PVA is used by partners who are facing financial difficulties and are currently unable to pay their debts or will shortly be unable to pay their debts.
Partnerships could be facing financial difficulty for a wide variety of reasons, so it’s always important to contact a licensed insolvency practitioner to establish if a PVA is the best route for business recovery.
Partnerships entering into a PVA are often facing cash-flow problems, due to shortfalls in trading or economic downturn. A partnership may have lost a large and important client, or they may have lost funding or investment for their business.
A PVA can be used to essentially buy a partnership time by taking the pressure off their repayments. This allows the partnership to restructure, or find new clients or funding without having to be liquidated.
Importantly, a PVA should only ever be used when there is a chance for recovery of trade and profitability in the long term. A partnership needs to be viable for a PVA to be implemented. It won’t work if the partnership simply slips back into financial hardship again once the agreement has ended.
A PVA can be an appropriate course of action in many negative financial situations, but it’s always important to investigate other insolvency measures that partners can also take.
Other options for the partnership include the following:
A PVA is often the first choice of action for struggling partnerships, as this agreement is made between creditors and all members of the partnership. However if a PVA can’t be agreed upon, individual partners in the business may be forced to create an Individual Voluntary Arrangement with their creditors.
Whereas a PVA only deals with the assets and liabilities of a business, if partners enter into an IVA they assume personal liability for debts owed by the business. In certain circumstances, a partnership may involve a mix of personal and business liabilities. In this scenario, partners may have to enter into both a PVA and an IVA in order to pay off their debts.
If partners and creditors agree that a business is no longer viable, then it may be decided that the partnership needs to be liquidised. Voluntary liquidation is never an ideal outcome – for partners or creditors – but it is a more appropriate option than compulsory liquidation.
Voluntary liquidation is a voluntary winding down of a business. Partners will be able to sell off assets to repay debts and come to an agreement that can help them to avoid personal liability for those debts, where possible.
If all negotiations between partners and creditors fail, then in a worst-case scenario the creditors can force compulsory liquidation. To do this, the creditors need to prove to a court that there is no other way for them to regain the money owed to them. The partnership will be forced to liquidate and sell its assets to pay the creditors, and they can be held personally liable for any outstanding debts.
Once a Partnership Voluntary Arrangement has been entered into and formalised by the partners, creditors and an insolvency practitioner, the partners are obliged to fulfil their side of the agreement.
Partners retain complete control over their business, both financially and operationally. The business continues to trade under the control of its existing partners, however it’s likely the partners need to restructure their business in order to meet the terms of the agreement.
Partners are still liable for any debts and have to stick to their new repayment terms, unless those debts have been completely wiped out. Therefore, the business needs to trade in order to make a profit to pay the debts. Partners will need to find new clients, new investment or sell off assets to keep to their new repayment schedules.
If a partnership fails to meet the terms of a PVA, then insolvency practitioners will need to reassess the situation and implement different insolvency measures. In the worst-case scenario, creditors can force a partnership into liquidation or bankruptcy to regain monies owed to them.
The exact terms of a PVA varies from one partnership to the next. The length of time a PVA is in force depends on the agreement made between the partners and creditors.
Because restructuring and reorganising a partnership can take time to result in profitability again, it’s unlikely than a PVA will last for less than 12 months. This depends on the viability of the business and long-term planning. PVAs can also be enacted for anywhere up to five years.
Because a PVA is a voluntary agreement, it must be the partners that set the arrangement into motion. If your partnership is struggling financially, the first step is to seek out independent insolvency advice from a licensed practitioner, such as Irwin Insolvency.
We can then provide appropriate guidance as to whether or not a PVA will be the best course of action for your partnership. If a PVA is decided upon, the insolvency practitioner then creates a draft agreement. A meeting is called between all creditors before the insolvency practitioner presents the draft for discussion.
When the details of the arrangement have been finalised, the PVA is put to a vote. For it to be passed, 75 per cent of the creditors must vote in favour of it. If the vote isn’t passed, then it’s back to the negotiation table.
Creditors are likely to be in favour of a PVA. They are more likely to regain the money owed to them through a PVA than if a partnership were forced into compulsory liquidation. If a PVA is successful and creditors recoup the debts from the partnership, then they can continue to do business together in the future too (if they remain on amicable terms).
At Irwin Insolvency, our team of experienced insolvency practitioners are ready to offer your partnership the consultation it needs to survive. We understand that no company, business or partnership is the same, so we strive to provide a personalised, tailor-made service that’s unique to your requirements. Our insolvency services are just a short phone call away.
With over two decades worth of experience working across a range of diverse industries and sectors in the United Kingdom, we’re confident that we have the skills and knowledge to help your partnership through tough times. We successfully implement Partnership Voluntary Arrangements that not only allow partners to repay their debts and escape insolvency, but allow clients to restructure before experiencing long-term financial stability.
Irwin Insolvency can offer your partnership expert consultation and independent business advice. To find out more or to arrange a free consultation, contact Irwin Insolvency today at 0800 009 3173 to speak to one of our specialists.