Company Voluntary Arrangements – a misunderstood or misused procedure?
If recent statistics are to be believed, some 86% of Company Voluntary Arrangements (CVAs) entered into between 2013 and 2015 have failed and an alternative insolvency process has been required. There are numerous reasons why a CVA may not work as intended however in the right circumstances a CVA still offers an opportunity to restructure a business whilst providing the best outcome for a company’s creditors.
So what is a CVA? It is a contract between a company and its creditors whereby the company offers to repay all or a percentage of its liabilities over a period of time, usually between 3 to 5 years, from ongoing trading profits, the sale of assets or a combination of both. Once approved, creditors are unable to continue to pursue a company for payment of a debt and if under the CVA the creditors are to receive dividends of less than 100 pence in the £, the remainder of the company’s liabilities are written off at the end of the CVA term.
As an Insolvency Practitioner, we have three different roles to play; first as an advisor to the directors, second to act as Nominee (to review the CVA proposal and consider if it should be put before the creditors for them to vote on its approval) and third, to act as Supervisor of the CVA. The Supervisors role is simply to supervise the CVA and ensure the company is doing everything it is required to do under the terms of the CVA. The directors therefore remain fully in control of the company throughout the process.
A CVA provides a company with an opportunity to restructure, perhaps to reduce costs by closing an underperforming part of the business, reduce staff or terminate onerous contracts. There is no requirement for the Insolvency Practitioner to undertake a review of the company or the conduct of the directors. Any personal guarantees given by directors should not crystallise nor will any overdrawn directors loan accounts have to be immediately repaid. Creditors may however want to see any loan accounts reducing over time.
The basic premise behind a CVA is that it offers the creditors a better result than would be achieved than in liquidation. In many cases, directors that are desperate to avoid liquidation will offer an unrealistic amount in the hope that a CVA will be approved however a contributions based CVA must be based on robust and accurate cash flow forecasts as there is simply no point in entering into a CVA where a company is unlikely to be able to meet its obligations. It is vitally important that directors fully understand the commitment a CVA requires.
Where a company is indebted to HM Revenue & Customs, it is important to start the process as early as possible to avoid HMRC commencing recovery proceedings and perhaps presenting a petition to wind up the company. Whilst there is a moratorium available under the insolvency legislation to protect a company in the pre-CVA period, the process requires the Nominee to effectively guarantee that the company will not incur any additional liabilities during the moratorium period and given that the Nominee is not in control of a company, it is a guarantee most insolvency practitioners are reluctant to give.
In order for a CVA to be approved, 75% in value of the voting creditors are required to vote in favour. Where HMRC is a significant creditor, HMRC will scrutinise the CVA proposal and may well challenge some of the assumptions made. It is vital therefore that if a company is forecasting an increase in turnover, profitability or a reduction in costs etc, there must be bona fide explanations given in the proposal. HMRC is likely to seek to modify a proposal to ensure that the company will comply with its obligations going forward and may seek to increase the amount the company has to pay or extend the CVA period. HMRC modifications will usually include clear instructions to the Supervisor in the event of any default by the company of the terms of the CVA.
There are various practical aspects that need to be considered prior to entering into a CVA. Whilst a CVA is not advertised, it is still registered at Companies House and accordingly it can have an impact of a company’s ability to trade. Even though a CVA is a rescue procedure, many suppliers consider the risk of trading with a company in a CVA too high. It is essential therefore that any essential suppliers are involved in the planning process to ensure continuity of supply. In addition, whilst only creditors of a company are notified of a CVA, customers may become aware and it is vital that terms of any contracts are checked to ensure they do not terminate on the approval of a CVA. Finally, if there are redundancies planned as part of a restructure, or if staff are aware of the financial position of a company, it is vital to explain the process and reassure remaining staff that they have security going forward.
If a company has any secured creditors such as a bank for an overdraft facility or loan, such secured creditors are not bound by a CVA and accordingly it is vital that discussions are held with any secured creditors to ensure ongoing support. In many cases, the bank may wish to withdraw the overdraft facility by converting it into a term loan and repayments can be factored into the cash flow forecast. Finally, whilst a CVA binds landlords for rent arrears it does not affect landlords proprietary rights and accordingly a landlord may forfeit the lease or the lease may terminate on the approval of a CVA. It is vital therefore to ensure the landlord fully supports the CVA process unless alternative premises can be found.
Providing directors are aware of the practical issues that a CVA can create and providing planning is thorough and all areas of risk have been considered, there is no reason why a CVA should not conclude successfully.