Partnership Voluntary Arrangements Explained
As mentioned earlier, this article will outline the procedure for the arrangement and when it is considered appropriate.
Definition of a business partnership
A business partnership is similar to a sole trader. The very definition of a partnership is two more individuals running a business together to make a profit. If there is a partnership agreement, this will define the role of each partner, their obligations and their stake in the partnership. There are advantages and disadvantages of a partnership when compared to a limited company. The main business partnership advantages are:
- Partners can draw funds rather than receiving a salary and are not liable for national insurance contributions.
- There are no filing requirements with companies house.
The main disadvantage is that if the business partnership was to enter financial struggles, you and the partner are jointly and severally liable for the entire business debt. Should one of the partners fail to contribute or becomes insolvent, the liability of the debt falls to the other partners. This will even apply to partners who have retired or if there is a fallout between partners. A clean break is not as easy with a partnership as with a limited company.
If the company does suffer major cash flow issues, a partnership voluntary arrangement may be a suitable option. This will allow you to work together to a repay a large proportion of the monies owed to your creditors.
How does a partnership voluntary arrangement work?
Similar to a company voluntary arrangement (CVA), the partnership voluntary arrangement is designed to provide the creditors with a higher return on the debts. The PVA also offers the opportunity to restructure the business model in an attempt to return to profitability. You and your partner will come to an arrangement to repay a certain amount each month, over a set period of time.
The PVA procedure will be overseen by a licensed insolvency practitioner (IP) who will outline affordable monthly repayments and distribute the amounts. The arrangement must be accepted by 75% of the creditors voting on the proposals. However, it will bind all creditors pre-dating the arrangement. PVAs, generally, last for around three to five years with creditors accepting the amounts paid under the partnership voluntary arrangement in full and final settlement.
It’s also important to note that the partners must be dedicated to making a success of the business and can make the realistic monthly repayments. Partners may even be required to undertake individual voluntary arrangements (IVA) alongside the PVA to safeguard the business and protect from personal bankruptcy petitions. More information on individual voluntary arrangements can be found here.
Who should opt for a PVA?
A partnership voluntary arrangement should only be considered where changes have been made from historic trading to make the business viable. This may mean cutting costs and making redundancies to ensure a monthly payment can be offered to creditors. If assets are to be sold as part of the arrangement, the PVA can also offer the time to sell these company assets at a better value than that of bankruptcy.
If you do decide that a PVA is the most appropriate route for your business, you should start by listing all of your creditors and their debts. One of the many business partnership advantages is that you do not have to do this on your own, but together with your partner to list the company liabilities and assets. It’s important that you do not exclude any liabilities and attempt to put realistic values on both them and the assets. From there, you can decide whether the company can prove profitable with these current overheads by preparing cash flow forecasts. Alternatively, if you are in need of a complete business restructure.
The PVA proposal
You must outline a proposal as part of the partnership voluntary arrangement, detailing the reasons the business has failed and the current financial issues. The PVA proposal will also include extensive detail on the structure of the procedure, the amount and how the creditors will be repaid.
For the creditors to decide whether to agree to the arrangement, the proposal should also contain a statement of affairs. The statement, essentially, sheds light on your financial situation and the outcome should the arrangement be approved. The document will also state how long the arrangement will last.
Advantages of a partnership voluntary arrangement
Of course, the primary aim of all businesses is to ensure profitability. However, if your company does fall into cash flow problems, there are many business partnership advantages to a PVA over compulsory liquidation.
Similar to a company voluntary arrangement, the PVA allows partners to retain control of their business and continue to trade. The primary aim of this procedure is to breathe new life into the company and return the business back to profitability. However, if you do allow the debts to build up, it’s highly likely the creditors will submit a winding up petition to close the business.
While there are other business partnership advantages to consider before entering a PVA, it’s worth noting that this process prevents the creditors from taking any further legal action against your partnership. You and your partner are afforded the necessary breathing space to deal with the debts and, hopefully, transform the business.
The business partnership agreement for the PVA also works in the best interest of the creditors, providing them with higher returns than that of winding up the partnership. However, it is important that you deal with these debts early on and seek critical insolvency advice to avoid compulsory insolvency.
We do recommend you seek immediate insolvency advice if you spot the early signs of financial trouble. Our business rescue experts will look to find the best solution to help your business return to profitability.