Portsmouth Publicises Debt Plan on Website

A Company Voluntary Arrangement - good or bad for business?

Not everyone is as lucky as Southend United FC who have narrowly avoided going into Administration today after its £378,000 tax debt was paid by Sainsbury’s! And this is not the case for FA Cup finalists Portsmouth, with debts of £119m – they are currently trying to secure a CVA [Company Voluntary Arrangement] to see if the debt can be paid off at a reduced percentage rate over several years.

Not sure how I would feel if I was a creditor to Portsmouth – according to a news report on 28 September 2008, 90 per cent of Portsmouth’s annual income was used to pay players wages! [So if the club owes so much money, did they cut back on wages?]

A CVA can be used in many cases to save a business from going into liquidation, but it only works if all the creditors agree to the percentage in the pound being paid back AND if the payments are upheld.

Portsmouth have published a letter to creditors, which included the background to Portsmouth's current plight and all the figures, on their website (www.portsmouthfc.co.uk). Figures from the public documents show that they owe £17.3m in transfer fees for the purchase of other players, a whopping £9.7m to Agents and Scouting Fees, and £17.1m in VAT, NIC and PAYE! £4.37m is owed to approximately 420 traders.

It’s interesting to read if you have the time because it does take you through the history of how Portsmouth reached the point they are at today.  But it also will help you to understand how a business is presented in the case of a CVA.

How a CVA works

A CVA is a legally binding agreement and needs to be approved by the Court. Usually you would expect a business turnaround specialist to work with you to produce the Report to Creditors as seen on the Portsmouth website. This involves lots of research and spread sheets – and most importantly, working out cash flow so that you can agree how much of your debt you can pay back to the creditors. It may be that you end up paying 50 pence back of every £1 you owe. So if you owe £500,000, you end up agreeing to pay back only £250,000 [as long as the creditors agree to this ie only getting back half of what is owed to them].

Some may say this is grossly unfair for the trade creditors, but it may be that without agreeing to the terms of the CVA the trade creditors end up with nothing. There is also a risk that with a CVA the company will simply continue running the same as before and no new management systems or people put in place, so the bad management may continue and the business end in liquidation anyway.

The Benefits of a CVA

No more CCJ’s or winding up orders can be issued against the company and at the end of the 5 to 7 year term of the CVA, the company has written-off 50 percent or more of it’s debts!

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