This is a guest article written by Luke Cockerton from DCA Business Recovery.
A Company Voluntary Arrangement (CVA) is one of the Insolvency sectors buzzwords at the moment following on from the notable cases in 2018; House of Fraser and New Look. This year has already seen a number of CVA’s proposed by large retailers such as Paperchase and Giraffe restaurants, but why are these companies seeking a CVA and what are the implications of doing so?
What is a CVA?
A CVA is available to all limited companies as an Insolvency procedure and is used when a company still has a viable business but is struggling with debts. A CVA is deemed as a recovery option and allows the company to continue trading whilst coming to an agreement with its creditors to repay some or all of its debts, depending on the cash flow of the business this is generally anywhere between 25% and 100% plus interest of its debts.
A CVA provides the company with a fixed period for the debt to be paid back, usually 5 years, or less if the company can pay back its debts in a shorter period. This will all come down to the cash flow of the business and what it can afford to repay each month from trading profits.
How can a company propose a CVA?
The directors, with the assistance of an Insolvency Practitioner, prepare a proposal to be sent to creditors and deliver it to the Insolvency Practitioner who acts as Nominee. The directors must include a statement as to why they believe an arrangement is desirable and the reasons the creditors may be expected to agree to it.
The proposal will include:
- Details of the Assets and Liabilities of the company
- Any transactions which would otherwise be investigated in Liquidation
- The proposed duration of the arrangement
- Dates when creditors will be expected to receive a dividend
- How the business will be dealt with during the arrangement
- The changes that are proposed to be made to the business, or any changes that have already been made to enable the business to become profitable once again
The Nominee files in Court their comments on the proposal, that it is:
- Fit for purpose
- Fair to all creditors
- Has a good chance of being accepted
A meeting of the creditors will be called for no more than 28 days from filing the proposal in court but a minimum of 14 days notice to creditors of the meeting.
In the period between sending notice to the creditors and holding the meeting, the Nominee will be in contact with the creditors to seek their comments on the proposal. Creditors will vote either before the meeting or at the meeting and can either Accept the proposal terms, Reject the proposal terms or Accept with modifications.
The resolution to agree the proposals for the CVA will require 75% of those creditors present and voting on the day. Therefore, it is important to hold initial discussions with key creditors at the outset to see if they are willing to consider a CVA.
Once agreed the shareholders will then hold a meeting immediately after to consider the proposals. This resolution requires more than 50% of the shareholders.
Why would a company propose a CVA?
A CVA is preferable by companies because not only does it enable the business to continue trading but the company retains control. This is key because in many specialized industries there is usually no one better positioned to understand how the business trades than the directors.
Employees retain their jobs and the company can continue to benefit from the experience of the staff members. This means that there will be no large scale redundancies.
There is also no formal investigation into the conduct of the directors under a CVA as there would be in Liquidation into such matters as; preferences, transactions at undervalue, misfeasance of the directors and transactions defrauding creditors.
Disadvantages of a CVA
There are a few disadvantages of a CVA, the main one being that should the arrangement fail the creditors will require the company to be wound up via the court. There will be funds held by the Insolvency Practitioner to enable this to be done.
Creditors will also usually require the directors to limit their income and for the company to not pay dividends to shareholders during the period of the CVA.
The Impact on enforcement
If the business is not currently in liquidation, in a CVA or has not had a winding up petition issued against it, and meets the small company criteria which is:
- Turnover - Not more than £10.2 million
- Balance sheet total - Not more than 5.1 million
- No more than 50 employees
They can apply for a Small Company Moratorium via the courts which means that:
- No winding up petition can be presented
- No Administration Order can be presented
- No Administrative Receiver can be appointed
- Landlords cannot exercise their rights of forfeiture
- No further steps can be taken to enforce any security or repossesses any goods under a HP agreement
- Company meeting cannot be called without the consent of the Nominee of leave of the court.
However, should the company not file for a moratorium then creditors are free to continue action against the company up until the date that the CVA is accepted by creditors. Should the agreement be accepted by the requisite majority of creditors then all creditors will be bound by the terms of the arrangement and therefore cannot continue their action.
A CVA is an extremely powerful procedure and used correctly can save a business, however, as it generally is a 5-year term it is of upmost importance to seek advice early and to ensure that the CVA is affordable and that the company is able to meet its monthly payments for the full period.
About the author
Luke Cockerton is a Fellow of the Insolvency Practitioners Association providing corporate insolvency advice. His areas of expertise are Creditors Voluntary Liquidations, Company Voluntary Arrangements, and dealing with contentious insolvency matters.