Guide to Company Voluntary Arrangements
Company Voluntary Arrangements (“CVAs”) are a very effective insolvency procedure / rescue tool for financially troubled companies. Surprisingly, however, this procedure which was introduced in the Insolvency Act 1986 is still used relatively infrequently (although in recent years a number of high street retailers have utilised them) and in all cases should only be entered into after expert, detailed advice has been sought.
Company Administration (including pre-pack administration) and Liquidation (the latter sometimes caused because of a winding up petition) are often the preferred option, but as these usually mean the closure of a company and its business, some prefer other forms of ‘rescue’ package. We have run many successful Company Voluntary Arrangements. If you are looking to reduce the pressure and the problems involved, then a CVA could be the answer.
In this article we look at the following areas regarding Company Voluntary Arrangements:
- Definition
- Where a CVA may be appropriate
- The CVA Process
- Benefits of Company Voluntary Arrangements over other Insolvency Procedures
Definition of a Company Voluntary Arrangement
A Company Voluntary Arrangement (“CVA”) is an agreement between the company and its Creditors: unsecured, trade and statutory, to repay them in full or in part from future profits. Alternatively, a proposal may be drafted which calls for assets to be sold and for creditors to benefit from the proceeds.
An agreed repayment plan to relieve financial problems
The agreement is based on preserving the Company, protecting the employees and their pensions (as far as it possible), and making repayment contributions to Creditors over an agreed period of time.
When is a CVA likely to be appropriate?
- A viable business which has been profitable in the past and can return to being a ‘going-concern’ and profitability (a set of accounts proving the above will be required) if given a suitable ‘breathing space,’
- An agreement which is sensible and structured in a way that suits the Company and its Creditors (it is important to note that this could well be subjected to detailed analysis),
- Introduction of appropriate levels of working capital in addition to the restructuring of debt, and
- An acceptance from the directors that a change in their role in the overall management of the Company may be appropriate.
The CVA Process – who proposes a CVA?
It is the Directors who normally propose a CVA. If a Company is in Administration or Liquidation, the Administrator or Liquidator also has the power to initiate the process. A CVA can only be proposed if a Company is insolvent.
Take a look at this page for an infographic of the CVA process.
Is a CVA right for my company?
The first step for the Directors is to meet with a Licensed Insolvency Practitioner (“IP”). We, at Antony Batty & Co have dealt with over 170 CVAs, of which cica70% have been successful or are still on-going.
The Directors, with the help of the Insolvency Practitioner, undertake a formal comprehensive financial review of the business, all of the outgoings and sales being subjected to detailed analysis. This will help evaluate whether an application for a CVA is an appropriate procedure to choose from all those available options.
Financial forecasts for between three and five years should be prepared, with proposals designed and drafted to take into account the following criteria / requirements:
- The preservation of the business,
- The maximisation of the interests of creditors including contributions in the medium to long term,
- If possible, reduce the risk of any staff redundancies, and
Once the draft proposal is ready the Directors review it. With the IP they will decide whether or not the proposal is achievable and for the benefit of Creditors. If this is not the case, then it may be advisable to close the business by way of Liquidation or Administration.
During this period, the Directors must take care to ensure that the financial position of the company does not worsen and that the liabilities / debts to any Creditor should not significantly increase or decrease, and must resist any of the bullying tactics that some creditors may employ.
The Company has the opportunity to reduce costs of employment and overheads that would not be available to it ordinarily. Employment contracts can be terminated, along with leases for property and assets.
Once the Directors and the IP are happy with the proposals they should open a dialogue with The Company’s secured Creditors. These are normally Banks and/or Factoring or Invoice Discounting Companies
In our experience the Banks and Factoring Companies will be supportive of proposals which are sensibly drafted, achievable and show that the business is viable. Having their own security, they will not therefore accept an agreement which reduces the chances of their debts being repaid.
The Directors and Insolvency Practitioner also talk to HMRC’s Voluntary Arrangement Service Department (“VAS”) that deals with all CVAs and Individual Voluntary Arrangements (“IVAs”).
The CVA proposal is then signed and registered / filed at Court and given a legal originating number, which is then sent to all Creditors by the IP who becomes the Nominee together with notice of a virtual meeting to consider them. Creditors are given notice of at least two weeks but in practice a longer period is given to ensure all creditors have time to consider the proposals.
The meeting which has to be held at a venue and a time convenient to Creditors is chaired by the IP as Nominee. Creditors are often represented by proxy. The purpose of the meeting is to allow Creditors to scrutinise the proposals and approve them or otherwise.
- The Creditors’ Meeting
Creditors will vote on the proposals at the meeting which will be approved (and therefore binding) if 75% by value of the total value of Creditors at the meeting (whether in person or by proxy) vote in favour.
A second vote excluding connected Creditors is taken and provided that not more than 50% of Unconnected Creditors vote against the proposal, it is approved.
Creditors may wish for modifications to be made to the proposal. These changes have to be accepted as reasonable by the Company and by the same majority i.e.75% of creditor by value. Modifications are usually suggested by HMRC to ensure that future debts are paid on time and tax returns are filed on time.
A shareholders meeting is held at the same time to approve the proposals and if appropriate modify them with a 50% vote in favour required.
If both meetings approve the proposal the meetings close and the Nominee becomes the Supervisor of the arrangement, who will send a report to all creditors, shareholders, and the Court.
Once approved all creditors are legally bound by the agreement. No further legal action or demands, except by leave of the Court, can be taken against the Company. Creditors then receive dividends from the Supervisor as set out within the terms of the proposal.
The Company must now make the agreed contributions to the trust account administered by the Supervisor. Failure to keep up with contributions will result in the failure of the CVA. This will usually lead to the Company going into Liquidation.
Once the agreed period is completed and a completion certificate has been issued by the Supervisor the Company comes out of the arrangement and the unpaid element of the prearrangement unsecured debts are written off.
- The Long-Term Viability of the Company
After the long-term viability of the company has been considered, a CVA proposal may be identified as the next step. By proposing a CVA the company directors are demonstrating that they are trying to maximise Creditors’ interests. If after that, the CVA does work then the company should return to profitability and the assets of the company will be protected.
- Dealing with Secured lenders – Banks, Leases, Factoring and CID
Many of our clients are very worried that the secured lenders will not support the restructure of companies using C V A.
All major clearing Banks have a pretty healthy approach to restructuring where the Directors are acting responsibly and quickly.
When a company is at risk (and generally the Bank will usually know there are difficulties) the Bank will monitor events, filing of management information, County Court Judgments and other legal actions.
In our view, it is always best to get the Bank involved as soon as appropriate, their ‘partnership’ in the process being invaluable. We advise clients to go to the bank with the solution generally mapped out. This may require a plan (flexible detailed plans always being the best) in writing or PowerPoint Presentation and at least a semblance of a CVA proposal with a statement of affairs even if the finished article is some way off.
- Do Banks Take a Positive View of CVAs?
In general terms the Bank will take a CVA proposal as a positive because it shows the board is acting in a timely fashion.
The Bank manager will often pass the client to the Bank’s special risk teams. They assess the proposals and ensure a consistent approach is maintained by the Bank.
Bank debentures and lending facility letters generally provide for the Bank to appoint an Administrator in the event of default. This is known as the Bank’s remedy. But this is very rare in a CVA scenario. The Bank will prefer to keep its powder dry and keep their remedy in abeyance.
The Bank will generally not want to appoint an Administrator, because this could lead to a reduction in the value of assets and in the business itself. In many cases the Bank would see a lower recovery and therefore seek to reply upon personal guarantees.
CVAs do not normally impact upon the Banks security and may not crystallise losses unless agreement is reached with the Bank as part of the CVA scheme.
A well-structured CVA can greatly improve the Bank’s recovery, maintain its security and provide a remedy and so Banks are, in our experience, very supportive of a well-structured CVA recovery plan, this especially being the case when they can see that the advice of Insolvency Professionals, like ABc has been taken into account.
It is possible that a CVA alone cannot provide the working capital improvements needed. We have frequently asked for capital payments holidays for lease and HP agreements and bank loans. If a good case is made, using quality financial forecasts and cash flow projections, then often the secured lender(s) will agree to help the Company through the dark periods ahead.
Banks want to support their customers; they do not want to knock the business down and see a possible loss. Even with personal guarantees in place, they will seek to find solutions with the company’s board.
HOWEVER, if you don’t “act,” don’t provide the bank with information, don’t react to the demands of your creditors, and don’t seem to “get” how bad things are, then the Bank can appoint investigating accountants or even worse Administrators under its security very rapidly.
Is a CVA right for my company? Benefits of a CVA over other Insolvency Procedures
What are the main advantages of a CVA?
CVAs have many advantages over alternative Insolvency and Restructuring Procedures. The main ones are listed below:
1. Continue Trading
A CVA allows a Company to continue trading. This can even be the case if a creditor has advertised a petition against the Company, as a CVA prevents any further legal action being taken, thus making a CVA one of the best debt solutions available.
2. Maintaining Control
Unlike other procedures, when a company is insolvent, a CVA can allow the directors/owners to continue trading whilst maintaining control of the company.
3. No investigation
There is no investigation into the conduct of the directors under a CVA although full disclosure of the relevant facts must be made to any potential officeholder.
4. Freezes Interest and Charges
A massive saving for any business.
5. Retain contracts and accreditations
Valuable contracts can be retained together with certifications and licences which would be difficult to transfer into a new Company or would likely terminate in other processes.
6. Terminating Leases and/or Contracts
Unprofitable or undesirable contracts may be terminated. For example, a lease, supply contract or even employment contracts when cutting prior to or under a CVA.
7. Reduction of Debt Owed
A proportion of the debts owed by a company must be settled during the course of a CVA. This could be as low as 50% of the sums owed (this may require some negotiating with creditors).
8. Restructuring of Business Model
Not only can a C V A ‘allow you time’ to restructure your business model to begin making a profit again, but directors will also have the added benefit of a professional business rescue team at their disposal to help them formulate a viable plan.
9. Improved Cashflow
The discipline of producing a 3-5 year plan with cash flow forecasts and then achieving it will invariably improve cashflow because, with professional assistance the management of the business will control the businesses finances rather than being controlled by them.
What are the disadvantages of CVAs?
- Procrastination
Since a creditor cannot initiate a C V A, the directors will need to do so. There are times when directors or owners wait so long before proposing a CVA, that it may be difficult, if at all possible, to turn business back around to profitability. The best advice we can offer to overcome this difficulty is, don’t procrastinate. Act Now!
2. What happens if you fail to keep to the Arrangement?
Failure to keep to the arrangements could land you right back in difficulties, the benefits of the ‘moratorium’ gained by the CVA having been lost. This means that the payments agreed in the arrangement need to be paid in full and on time.
3. Credit
Some lenders and suppliers will not be overly eager to extend credit in the future after you have entered into a C V A.
4. Length of time
A CVA will ordinarily run between 3 and 5 years which is a long time to be in a process and to make payments out of profits.
5. Secured creditors
Lenders with security will not be bound by the CVA but their support is essential.
6. Creditor support
75% of the company’s creditors by value who chose to vote must vote for the CVA proposal in order for it to succeed.
The Advantages Outweigh the Disadvantages
The advantages of CVAs are far greater than the disadvantages, but the key hurdle is the likelihood of the company’s proposal succeeding and the CVA completing. These are the most difficult hurdles which must be overcome and that means that a viable and profitable business must be able to emerge from the CVA.
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