Despite having been around for almost 30 years, the Company Voluntary Arrangement (‘CVA’) is possibly one of the lesser-known and least-used of all the corporate insolvency procedures. Recent Insolvency Service statistics show that of the 4,052 formal insolvencies in Q1 2015, only 93 were CVAs, the lowest level since Q4 2007.
So it may come as a surprise to discover that, in terms of enabling a company to restructure its business and/or resolve its debt problems, the CVA is ‘a little gem’.
Introduced as an entirely new procedure by the Insolvency Act 1986, the CVA was intended to remedy an acknowledged weakness in then-company law: a company had no simple means of entering into a binding arrangement with its creditors. Options available at that time required the consent of every creditor, which made them cumbersome, slow and costly… and so enter the CVA.
What exactly is a CVA and how can it be used to assist an ailing company?
A CVA is a compromise between a company and its creditors that allows it to either settle debts by paying only a proportion of the amount that it owes, or to come to an arrangement over the payment of its debts.
The CVA ‘Proposal’ put to creditors typically involves on-going trading over a period of years. Generally speaking, provided that 75% in value of the creditors who vote are supportive, then the CVA becomes binding on all of the company’s unsecured creditors – including those who did not vote (through choice or lack of notice) and even those who voted against it. The effect is that none of the unsecured creditors is able to take enforcement action against the company outside of the CVA.
Whilst the law sets down both the procedure for a CVA and dictates the basic content of the Proposal, the rest is determined by the company – which is then, of course, subject to creditor approval. This makes a CVA an incredibly flexible tool with which to rescue a business and means that each Proposal can be tailored to meet the individual and specific needs of the company.
In fact, the CVA has some extremely attractive qualities for both the company and its creditors. Continued trading and making contributions from future profits is a common feature. The beauty of this is that the company remains operational as a separate legal entity and existing management remain in place. The ‘trade off’ comes in the role of the Supervisor (who must be an insolvency practitioner), who must ensure that the agreed terms of the CVA are implemented to its successful conclusion.
Because a CVA has no effect upon employees’ contracts, it allows jobs to be preserved … unless of course, the company needs to make redundancies prior to commencement, in which case the redundancy costs are included in the CVA; use of the CVA in this way provides an incredibly useful restructuring tool for a business.
Company contracts, accreditations and licences are generally unaffected which makes a CVA an attractive option for certain types of business, such as haulage and construction or for those in regulated sectors.
Where a CVA starts part way through the financial year, the company’s liability for Non-Domestic Rates for that entire year is a debt in the CVA. Clearly, not having to pay rates for the remainder of the financial year can, dependent upon timing, provide the company with a significant financial benefit.
Approval of a CVA does not, in itself, have any tax implications. The company continues to be liable for tax post-CVA however, any liabilities for tax arising prior to and up to the date of the CVA fall within the CVA, even if they are payable at a later date. Additionally, the company may continue to use tax losses against future profits.
From the company’s standpoint, a CVA effectively provides an interest-free loan with which to repay a percentage of its debt. From the creditors’ viewpoint, the comparatively low costs of the process and the ability to save the business as a going-concern mean they can often expect a greater return in a CVA than in another process. In addition, suppliers will also benefit from an on-going trading relationship with the company.
Yet, despite the abundance of benefits, the CVA appears to be under-used as a rescue tool.
Why is the CVA underused?
At up to five years, the duration of a CVA may be a little off-putting for some, but the lack of a statutory moratorium (such as in Administration) is possibly the greatest reason for its under-use. A company needs breathing space in which to present its Proposal; without an effective means of preventing enforcement action by a determined creditor (such as a winding up petition), a CVA may not be viable. The option of a moratorium does exist for smaller companies, although in practice it has proved to be of limited use. Yet this does not pose an insurmountable problem for the insolvency practitioner, who will simply couple the CVA with Administration. Whilst this may increase the costs to some degree, the outcome is likely to pay dividends.
The position of the secured creditor is a possibly a further factor. A CVA must not affect the rights of a secured creditor to enforce its security without its consent. Effectively therefore, the company’s bankers sit outside of the CVA process. Whilst banks can use their security to take alternative forms of action against the company, many view the CVA as a positive tool. Not only is the company in a stronger position post-CVA (as all of its liabilities are typically bound into the CVA), but on-going trading enables it to continue servicing the bank debt. Directors with personal bank guarantees also benefit from the lack of crystallisation of their position.
The CVA had its opportunity to shine as a method of rescuing businesses in the retail sector. With the change in consumers’ buying habits, retailers with large high street property portfolios found themselves with a number of unnecessary and unprofitable outlets, which they needed to deal with if the viable business was to continue. A number of legal cases in this area have now clearly established a principle that allows a CVA to treat different groups of creditors differently e.g. to treat high-performing and underperforming leases differently. Consequently, the CVA has become a powerful means of affecting overnight closure of unprofitable stores, restructuring of property liabilities and reduction in rents – provided of course that the CVA, as drafted, treats affected landlords fairly.
The use of the procedure in relation to hotels and leisure in recent times also seems to suggest that the use of CVAs is spreading beyond the retail sector.
So, we may only have come to appreciate the value of the CVA as a restructuring tool in recent times. In view of the contractual nature of a CVA, its potential for use is probably limitless. The key is to ensure that the Proposal is drafted appropriately to meet the needs of both company and creditors … as ever, the devil is in the detail.
To find out more about the corporate restructuring and insolvency support we offer our members, click here.
Back to updates