COMPANY VOLUNTARY ARRANGEMENTS
In simple terms, a CVA is a deal or compromise reached between a company which cannot pay its debts as they fall due and its creditors, typically for repayment of a percentage of a company’s debt over an extended period of time.
It is a formal procedure governed by the Insolvency Act 1986 and overseen by a Licensed Insolvency Practitioner. However, whereas Liquidation has over 100 Sections in the Act, the CVA has only 7.
You will therefore appreciate that it is a very flexible procedure. In essence it is for the company and its creditors to agree a deal that is acceptable to both side and creditors may well be tempted to agree to a CVA if they see that it offers a better return than Administration or Liquidation.
However, an early word of caution. Without, some sort of “new ingredient” eg injection of funds, new management, change of product, new business model etc a business that has been loss making in the past is likely to be loss making in the future and a CVA might therefore be simply delaying the inevitable failure of the company.
But if there is a sound underlying business in place and a coherent explanation for past difficulties, then a CVA might form a viable alternative to Administration or Liquidation, preserving value for stakeholders in the company.
The procedure is perhaps particularly applicable to retail and licensed trade business where unprofitable outlets or pubs (which but for a CVA the company could not otherwise exit) are dragging an otherwise profitable business down. We look at this in more detail later in this article.
The procedure is relatively straightforward.
- The company with the assistance of a Licensed Insolvency Practitioner (the Nominee) prepares a proposal that outlines the reason for the current difficulties and the plans for the future. It will also outline the projected return for creditors, typically so many pence in the £ over a period of time, often several years.
- The proposal needs to be a detailed, well thought out document as this is what creditors will consider when deciding whether or not to support the CVA. In this respect, cheapest is not always best. You get what you pay for. We appreciate that available funds for professional costs will be of course limited but a low Nominee’s fee tends to mean little assistance from the Nominee and this can be a false economy.
- The Nominee will issue the completed proposal to creditors and convene a creditors meeting on a minimum of 14 days notice. In this period, the company is not protected from creditor action although in certain circumstances, a moratorium can be obtained.
- At the creditors meeting, a majority of 75% or more in value of unsecured creditors who attend either in person or by proxy must vote in favour of the proposal. If any connected votes are used in favour, then a second vote is held at which connected votes are excluded and a majority of 51% of unconnected unsecured creditors must be in favour. This second vote is to avoid connected votes being issued to force through inappropriate proposals.
- The position of HMRC is crucial. They will often have a “blocking” vote ie over 25% and they need to be onside. Compliance in the past, ie timely submission of returns can be as important to them as payment and as you have seen in the recent case of Rangers Football Club, if they feel that they have been prejudiced, they will not support any form of proposal.
- A shareholder meeting is then held to sanction the creditors decision and a majority of 51% of shareholders needs to be in favour.
- If the proposal is accepted, then the Nominee becomes the Supervisor and does what his title suggests; supervises (or monitors) the CVA. He does not become actively involved in the day to day affairs or management of the company.
- A typical CVA will provide for payment of a regular set figure or percentage of profit to be paid to the Supervisor over an extended period of time and these funds will be passed on to the creditors.
- Once the company has complied with terms of the proposal (and this will rarely be repayment of creditors in full) the CVA ends and creditors write off any unpaid element of its debt. The company is then free to trade as normal and stakeholders, in particular shareholders, retain value which would not have been the case had the company collapsed into Administration or Liquidation.
So far so good. But we need to consider why CVA’s are relatively uncommon.
They are a formal insolvency procedure and whilst they are not advertised, notification has to be sent to the Register of Companies and this will be picked up by credit reference agencies. So a company’s customers might well become aware of the CVA and could be nervous about placing business, especially any long term contracts, with a company which is clearly in financial distress.
Also, suppliers who are being asked to defer payment and perhaps write off an element of their debt, are often understandably reluctant to offer further credit, so cashflow might be a problem.
The company is also faced with the prospect of contributing its surplus income into the CVA for several years to come, so will have limited funds available for investment in the future of the business.
However, there are certain types of business which appear well suited to the CVA process and retail and the licensed trade are high on the list.
Consider a company which has, say, 6 outlets or pubs of which 4 are profitable and 2 are not. The losses in the 2 unprofitable outlets are dragging the business down and it cannot afford to exit the leases on the 2 outlets in question.
If a CVA was prepared, the unprofitable outlets could be closed and the exit costs eg unpaid rent (past and future), dilapidations, employee redundancies etc could be included as claims in the CVA (and compromised into an agreed figure eg 12 months rent) and paid over a period of time out on the profits made in the future from the 4 profitable outlets.
We have seen this procedure used on a number of high profile retailers recently eg JJB Sports (twice!), Blacks, Focus DIY, Barratts, Racing Green, but there is no reason why it cannot be used on smaller cases too. The key is to offer a reasonable return to creditors but also to engage with key creditors at an early stage. We have found that if they feel they are part of the process early on, rather than treated as an afterthought, they are more likely to vote in favour of the proposal.
Finally, we should mention that much of what we have said above is equally applicable to Partnership Voluntary Arrangements (“PVA’s”) and Individual Voluntary Arrangements (“IVA”) for partnerships and sole traders respectively.