PVA’s – Parnership Voluntary Arrangements
A PVA is a formal insolvency procedure enabling a partnership to make a proposal to its creditors regarding payment of debts, or a scheme of recovery for the business interests involved.
A PVA is similar to a Company Voluntary Arrangement in that it is a formal arrangement with the partnership’s creditors for an agreed duration and under terms agreed with creditors.
Should a partnership find itself in a position where it is insolvent or experiencing severe cash flow problems, but has a viable business which will generate profits by trading on, there are a number of options available to the partners and/or the creditors under the provisions of the Insolvency Act 1986 and the IPO, such as the formal winding-up of the partnership as an unregistered company (possibly in conjunction with the bankruptcy of one or more of the partners), a partnership administration order (which is similar in procedure and effect to a standard administration order) or a PVA (possibly in conjunction with interlocking individual voluntary arrangement’s (‘IVA’) of one, some or all of the partners).
In the case of a PVA, if approved by creditors, the partnership will be protected from the actions of its creditors to allow it to continue its business. The PVA may be approved by creditors on basis that it gives the partnership a certain time frame to realise an asset and/or to make contributions from future profits for a set period, with a view to achieving a recovery to creditors, which may not be available in the case of a winding-up of the partnership.
In a PVA, (unlike the procedure for IVA’s) there is no protective interim order so consideration should be given to first obtaining an administration order in respect of the partnership, to obtain protection from creditors prior to implementing a PVA. This would depend upon the level of creditor pressure at the time.
Implementing a PVA
The procedure for implementing a PVA is relatively straightforward, although the proposals for the arrangement can be detailed and, depending upon the partnership’s affairs, may be complex to draft. The partners of the firm must propose the PVA and, dependent upon the partnership deed, it is likely that unanimous approval is required. A qualified insolvency practitioner is appointed and acts as nominee and will assist and advise the partners in completing proposals to creditors, which will include details of the partnership’s and partners’ individual financial affairs. The nominee will report to the court on the proposals and a copy of the report, together with the proposals, will be sent to all creditors, giving at least fourteen days notice for a meeting for creditors to consider and vote on the proposals.
At the meeting the proposals will be approved if 75% majority in value of the creditors present in person or by proxy vote for acceptance of the PVA. It should be noted that if more than 50% in value of non-connected creditors vote for rejection of the PVA, it will fail (connected creditors would include employees of the partnership, other partners and their relatives). Once the proposal has been approved, it becomes binding on all creditors who have notice of the meeting of creditors. Secured creditors will not, however, be bound unless they give their express consent. Preferential creditors will be bound if the proposal does not affect their priority or their relative dividend entitlement. The nominee, or another person appointed in his place, will then supervise the implementation of the arrangement.
Once the arrangement is in place the partners will retain management of the partnership and the supervisor will monitor the arrangement and ensure that the terms of the proposals are adhered to. It will also be necessary for the supervisor to agree creditors’ claims and to distribute funds as and when appropriate.
PVA Pros and Cons
The main benefit of the PVA is that once it has been approved by creditors, and assuming the partnership complies with the terms of the arrangement, the partnership creditors are unable to pursue the partners’ individual estates for payment of any shortfall under the PVA. Other benefits of this procedure are that in the cases of larger partnerships, implementing interlocking IVA’s for all of the partners may be difficult or impossible to administer.
It is also likely that, particularly in the case of professional partnerships, in view of the fact that any value for goodwill will be tied up in the partners themselves and their ability to generate fees, trading on will probably enhance realisations. In addition, by avoiding bankruptcy proceedings from the partnership creditors, in the case of professional partnerships the partners may avoid expulsion from their recognised public bodies, which could result in an inability to continue working in their profession.
The disadvantages ofan PVA; are that unlike an IVA there is no interim order so the partnership may be forced to consider an administration order to obtain protection from creditors, pending the implementation of the PVA. An administration order is costly to obtain and may only be appropriate in the case of larger partnerships. A further disadvantage is that the PVA will not protect the partners from the actions of their personal creditors.