What is Partnership Voluntary Arrangement?
Partnership Voluntary Arrangements (“PVA’s”) are largely based on Company Voluntary Arrangements, and are governed by the Insolvent Partnerships Order 1994.
A PVA is a formal arrangement between the partnership and its creditors’, which allows a proportion of its debt to be repaid over an agreed period. The amount to be repaid will vary in every case as it is entirely dependent on the partnership’s affordability. If the partners agree that the business is viable, and are committed to its survival, then a PVA can be a useful way to restructure the business and will likely result in an improved outcome for the creditors’.
The PVA procedure suits partnerships with numerous members who are keen to avoid Bankruptcy. It is important to note that if a PVA is approved, this will prevent partnership creditors from pursuing a partner personally, to recover a partnership debt.
Is a PVA a suitable option?
A PVA may be the most appropriate solution where the business is faced with short-term threats to its financial position. If agreed, a PVA is not advertised and can protect the goodwill of the partnership, whilst at the same time providing a solution to financial difficulties.
A PVA can also prevent a partnership creditor from obtaining a bankruptcy order against one, or more of the individual members’. Depending on the partnership agreement itself, the bankruptcy of one of the partners could result in termination of the partnership, or the loss of a professional partner’s ability to practice.
If it is agreed that a PVA is the best option, then the next steps will be to nominate an IP to act in relation to the PVA and work with that IP to draft PVA proposals. If it transpires that a PVA is not a suitable option, then the IP will explore the other options available, such as winding up.
What are Interlocking Individual Voluntary Arrangements?
Partners can always seek the financial resolution of an IVA, whether acting alone or together with the other partners in the business.
In doing so, this could result in several, or all, of the partners seeking approval for ‘interlocking IVA’s’ which will usually contain similar terms, and operate in conjunction with each other. Where individual partners’ have assets and liabilities which fall outside of the business, these must also be protected.
It could be that seeking approval to a number of interlocking IVA is the most appropriate route, unless there are a large number of partners, when a PVA is likely to be the most appropriate solution. It is important to note that the approval of a PVA will protect an individual partner from claims by any of the partnership creditors’, but it will not protect against claims from any creditors’ which fall outside of the partnership.
For further information on Individual Voluntary Arrangements, see here.
Benefits and Risks of PVA
The principal benefit of a PVA is that the partnership continues trading, and the business is preserved.
A PVA allows the partnership to repay an affordable amount, with a proportion of debt being written off once the arrangement has been successfully completed. Repayments under a PVA are affordable and usually condensed into a single monthly payment. Alternatively, the partnership can offer a lump sum in full and final settlement, or a combination of the two.
The Supervisor will not interfere with any decisions in relation to the daily running of the business, but will communicate clearly with those creditors’ bound by the PVA. This will minimise any interruption to continued trading, and provide continuity to customers and staff.
Generally, the timescale from initial contact with the IP, to agreement of a PVA, is around 8 weeks, but this depends entirely on the size of the partnership and the overall complexity of matters. It will take a number of weeks to produce a final draft of the proposal document, but if the partnership is under intense pressure, then steps can be taken to obtain legal protection against any other proceedings.
As long as the PVA is approved by the requisite majority, the PVA terms are binding on all creditors’ even if they did not vote, or receive notice of the meeting due to some honest omission. This means that they can take no further action to recover the sums due.
As with any insolvency process, there are some risks and these should be considered in full.
A PVA will be approved in the same way that a CVA is approved, although the partnership agreement may allocate a different rights to individual partners based on their seniority or length of service. In any case a PVA must be approved by at least 75% of the creditors’ (by value of debt), and by at least 50% of members’.
Although repayments in a PVA will be determined by affordability, these repayments will be subject to annual review, and the anticipated return to creditors’ should be maximised as much as possible. This could mean a restriction on salary increases, or benefits in kind.
As partners are generally jointly and severally liable for partnership debts, creditors’ are likely to want details of all of their individual assets, and some partners’ may have to make additional contributions into the PVA to gain approval of the PVA proposal.
A PVA proposal is subject to review by the IP acting as Nominee. That IP will only recommend that the partnership’s creditors’ should be invited to consider the proposals where it can be demonstrated that there is a clear balance of fairness, and that the partnership’s proposals merit serious consideration.
Careful consideration must be given to all options available to a financially distressed business. For more advice, fill out our Contact Form and we will be in touch. Alternatively, call our FREE ADVICE LINE on 0800 781 0990.