There has been increased news of companies using Company Voluntary Arrangements (“CVAs”), as High Street retailers have begun to use them in order to continue in business, some more successful than others.
Restructuring Executive, Sam Hawkins, explains.
BHS, House of Fraser and Toys R Us all started their insolvency stories with a CVA, all of which failed, and each company ended up in Administration.
According to statistics by The Insolvency Service, the number of CVAs fell from 500-800 per year between 2008-2014 to less than 380 in 2015 and continuing to decline.
A recent joint investigation by R3 and ICAEW found that 65% of CVAs were terminated without achieving their intended aims. It would be right to wonder, therefore, what’s the point in supporting a CVA if the business will fail anyway. On a positive note many don’t fail, and the businesses continue to contribute to the economy.
A CVA should be carefully considered by any creditor in receipt of a proposal. Whilst the proposal will likely be very verbose, it will often boil down to the debtor either requesting additional time to pay, forgiveness of some debt owing, or a mixture of both.
As a creditor, you will want to know if you will be fully paid, and if not why not, and how long the process will take.
The CVA proposal will probably include a comparison to liquidation, which is often put forward as an alternative to the acceptance of the CVA. This is likely to show that in liquidation unsecured creditors will receive less than they would in a CVA, if anything at all. This is part of the ‘advertising’ of the CVA to make the proposal sound more enticing to creditors – It’s better to get 50% of something than 100% of nothing. This comparison will assume that the CVA will go exactly to plan, so you will want to do your own considered review of this comparison.
For a creditor, one of the key advantages to a CVA compared to a liquidation is that the business is being rescued rather than closed. This means a potential existing customer is kept going forward, although it would be wise to review any future trading relationship with that debtor.
A CVA can also affect your cashflow. It can mean a large outstanding invoice may not be paid for a lengthy period, but at least you may receive some of the money which would not be forthcoming in a liquidation.
Another consideration of a CVA proposal is how much say you will have. Of those who vote, 75% of the unsecured creditors, by value, must agree to the proposal for it to be approved. Once it is agreed, it is binding on all unsecured creditors regardless of how they voted or indeed if they voted at all.
A creditor owed a small amount within the CVA may find it imposed on them regardless of their thoughts. Alternatively, a creditor who is owed more than 25% of total creditors could find themselves having an effective veto. Whilst their support for the CVA is necessarily required, if they want to block it, they can.
Any creditor can suggest modifications to the proposal where they do not agree some aspects of the CVA. Regular modifications include the need for any Director’s Loans to be repaid or a prohibition to dividends to be imposed during the term of the CVA. These can help to maximise the return to creditors as well as assist the viability of the CVA. A debtor can reject the proposed modifications, but this will count as a vote against the proposed CVA.
Ultimately, a decision to support a CVA is a commercial decision. There needs to be faith in the debtor to be able to make the changes put forward in the CVA which will result in the business being turned around and able to meet its obligations under the CVA as well as future.
This article covers some of the main issues to be considered when making a fully-informed decision regarding a CVA.
If one of your customers has proposed a CVA and you would like help to fully understand the implications and the process, please contact a member of our Restructuring team.