A Company Voluntary Arrangement or CVA allows a company that is viable to continue to trade whilst restructuring its debts. It can be a practical alternative to liquidation as the ailing company avoids closure and normally retains employees to continue trading.
That said, if the business has struggled in the past, the owners and directors may decide to make changes and restructure the business for smoother and more profitable operations, which in turn will affect employees by putting jobs at risk and making redundancies necessary.
What does a CVA mean for employees?
In this scenario, making redundancies can be a daunting prospect for owner and directors as well as all the employees affected even though it is an unavoidable step to achieve the survival of the business. One way to think about the problem is that a CVA aims to preserve the core business to save jobs that would have been lost if the company had been liquidated. Equally, if the business had entered administration, the administrator or licensed insolvency practitioner would have taken this crucial decision on downsizing the workforce, and owners aren’t involved in the decision-making process. This doesn’t happen in a CVA.
What if I Can’t Afford to Pay Redundancy to Employees?
In liquidation, all employees are basically laid off. For some companies, particularly those with loyal employees that have given years of service, this can have a major impact on the dividend which is payable to creditors. For companies that are experiencing cash flow problems, directors may think that they can’t afford redundancies or to make the necessary headcount cuts to survive.
Here, a CVA can give companies more breathing space as employees can be made redundant and paid through the government’s Redundancy Payments Office or RPO. In this way, employees receive their payments within a few weeks and the government then waits to be paid alongside other creditors in the CVA. For directors and owners, the benefits are that it makes redundancy more affordable by spreading the cost over three to five years, typically.
CVAs and Employee Rights
It is important to understand that CVAs don’t remove or reduce the company’s legal responsibilities towards its workforce in any way. Redundancies are subject to a range of requirements and failure to observe them could give rise to claims for unfair dismissal. The best way to reduce the risk is to be rigorous and follow the correct consultation process. Any employee who is made redundant is entitled to a full redundancy notice period and pay in line with the terms of their employment contract and employment law rules.
Once a CVA has been approved, employees of a limited company can claim the following from the RPO:
- Statutory notice pay
- Unpaid wages for up to eight weeks
- Holiday pay due up to six weeks
- Redundancy pay but only when the employee has at least two years’ continuous service
- Unpaid pension contributions
Employees receive a maximum payment of £489 per week per claim. For instance, if employees claim for redundancy pay and loss of notice they can make claims for both. Additionally, any claim for unfair dismissal by an employee, which is successful will be treated as an unsecured debt bound by the CVA.
Making redundancies to keep a business financial solvent during difficult times is therefore possible via a CVA. It also leaves the door open for potential job creation in the future.
Owners and directors who find this aspect of restructuring their business challenging and would prefer to have a specialist on-hand should call 08000 746 757 or email [email protected] for free and confidential advice from one of our professional advisers.