What is ‘hiving’ when used as part of a Company Voluntary Arrangement (CVA)?

Hiving assets and Company Voluntary Arrangements (CVAs)

A Company Voluntary Arrangement (CVA) is a formal insolvency procedure that offers the chance to rescue a financially distressed company by restructuring its debts and reorganising its operational framework. Underperforming facets of the business can be closed down, and negotiations with creditors may result in reduced monthly expenses. Additionally, this process provides an opportunity to revisit burdensome lease agreements and other contracts.

However, in more intricate cases, a CVA alone may not fully address the company’s concerns while also satisfying both shareholders and creditors. In such scenarios, it may be viable to employ a method known as ‘hiving’ as part of the CVA.

 

What is ‘hiving’?

A business asset, be it intellectual property or the entire business itself, can be vented to a newly established subsidiary of the company. This recently formed entity won’t carry any debts or obligations, but it also lacks a credit history, posing a potential challenge in securing external funding for acquiring the assets.

In such scenarios, payment might be facilitated through shares in the newly formed subsidiary. Although lacking a credit history, this is often deemed preferable to the tarnished credit record associated with a company entering a CVA (Company Voluntary Arrangement).

Post-transaction, the original company holds minimal assets, primarily comprising shares in the new subsidiary. Opting for a CVA under the guidance of a licensed insolvency practitioner allows the repayment of agreed amounts to outstanding creditors over a standard term of three to five years. The CVA supervisor, usually the appointed insolvency practitioner, will hold a charge over the subsidiary’s shares throughout the CVA term.

Upon successful completion of the CVA, and meeting all contractual payments, the original company may undergo liquidation if it no longer serves the shareholders’ purpose. The subsidiary shares owned by the original company can then be resold. Alternatively, the company may remain operational if shareholders so desire.

Read More:

• CVA Advantages
• CVA Disadvantages
• Fast Track CVAs
• Negotiating a CVA With Creditors
• Company Voluntary Arrangement CVA

 

Importance of expert advice

This procedure demands utmost caution, as any mishandling may be interpreted as a transaction at undervalue, constituting a serious violation of the Insolvency Act 1986. Such actions carry severe repercussions for company directors. It is, therefore, crucial that you seek the guidance of a licensed insolvency practitioner for expert assistance and advice before contemplating the transfer or sale of any company assets.

Engaging an insolvency practitioner not only ensures strict adherence to the Insolvency Act 1986 but also opens avenues for advice on alternative processes that might prove more advantageous for your company and its creditors. Options such as administration or pre-pack administration could be explored.

In times of financial distress, timely expert advice becomes paramount and can determine whether your company navigates through challenges successfully or succumbs to mounting pressures.

If you contemplate hiving as a component of a proposed CVA, it is crucial to note that, as insolvency practitioners, we are not authorised to offer tax advice. Therefore, it is imperative to thoroughly discuss any tax implications of this process with your accountant beforehand.

Vanguard Insolvency offers specialised assistance and counsel to shareholders and directors of insolvent or financially distressed companies through a network of nationwide offices spanning the country. You can schedule a free and entirely confidential consultation at any of our offices by contacting our director advice line.