It is intended to be a rescue procedure available to directors who consider that their company has a viable business going forward and are willing to commit and work hard to enable it to continue trading.
Once directors’ “Proposals” (including any agreed modifications) are approved (by meeting requisite voting majorities for both shareholders and creditors), these represent a legally binding agreement with creditors in which a proportion of the company’s debts are paid back over a period of time (typically between 3 and 5 years). Therefore, the company reduces its historic debt levels and makes affordable payments to the appointed licensed Insolvency Practitioner (“IP”) in accordance with the Proposals.
Media coverage of CVAs has been extensive due to their utilisation by well-known and high-profile companies, particularly in the retail sector. In addition, a number of these prominent CVAs terminated early. Despite this coverage, CVAs are the least common corporate insolvency procedure to date.
How can we help?
If your company is facing an uncertain future, creditor pressure is mounting and debts are increasing, it is vital that action is taken quickly and efficiently. Furthermore, it is imperative that you take independent and expert guidance as soon as possible. If you are unsure on the best way forward, you can arrange a free consultation with our sole IP in the strictest confidence. We are happy to help and can meet either at our offices or at a location that is convenient for you.
Regardless of the size of your business, our primary focus is providing directors with full details of the options available to them. Once we understand the problem, we will offer practical and constructive advice tailored to your specific circumstances. In most cases, hard and difficult decisions will need to be made. We are committed to providing you with all the information you need and to always be available to answer any questions you may have.
If directors consider that their business model would be financially viable without the intense creditor pressure and burden of historic debt, then a CVA might be the right option. A CVA requires all directors to work together and to fully commit to making the company successful going forward and to adhere to the terms and conditions of the Proposals approved by creditors.
If we agree that a CVA is potentially a viable rescue option, we will work closely with you to gain a full understanding of your business including the reasons behind the increase in debt levels. We will help talk you through the process and provide objective feedback on your cash flow forecasts which will form the basis of the amounts that the company can afford to distribute to its creditors.
However, if a CVA does not represent the best option available to the company, we will advise you on the alternatives. If professional advice is not taken soon enough, debt levels may mean that a CVA has little prospect of success or the company cannot continue trading in its current form. Options may include ceasing to trade and closing completely or an extensive restructuring of the business.
How might employees be affected?
This depends on the terms and conditions of the CVA Proposals that are approved by creditors. By way of example, if the company can only continue trading in the CVA with a reduced headcount, then some employees will, unfortunately, be made redundant. However, it is possible that these redundancies will protect other jobs in the company. For staff made redundant, they will be entitled to claim statutory amounts due to them from the government. Assuming employees meet relevant criteria, payments will be subject to statutory limits.
What if I have provided personal guarantees?
When a company enters a CVA, a creditor is still entitled to call upon any personal guarantee (“PG”) that you have provided. The creditor has complete discretion in this regard. As you would expect, the creditor cannot receive more than the amount of the original debt, plus interest and charges. In a worst-case scenario for you, as guarantor, you could be held personally liable even though payments are being made to the creditor as part of the CVA Proposals.
As a director of the company, what is my role?
Directors remain in control of the company including trading activities. Directors are required to adhere to all terms and conditions of the CVA Proposals (together with any modifications) that were approved by creditors. The CVA therefore represents a powerful tool that allows you to address key issues within the business, to cut costs and to restructure trading activities to ensure that there is a viable business going forward.
When is a CVA most likely to succeed?
- There is an underlying core profitable business, possibly after implementation of a restructuring or cost reduction exercise
- The company has financially suffered from a one-off incident (for example, its largest company entering liquidation)
- The causes of the company’s current financial predicament can be addressed within the CVA
- Your company is facing Administration or Liquidation and can realistically avoid that by implementing changes to its business model that will result in a return to profitability
- A better deal for suppliers who will only write off a proportion of monies owed to them
- The alleviation of short-term cash flow problems will enable the company to trade profitably going forward with a full order book
- Directors and key management staff (possibly with changes therein) are best placed to turn around the fortunes of the company
>What are some of the key stages of a CVA?
- Free initial no obligation consultation with our sole IP to discuss all options available
- Liaison re information and documentation needed to progress
- Drafting of the Proposals (the formal legally binding agreement with creditors)
- Review and approval of Proposals by directors
- Preparation of Nominee’s Report
- Members’ and creditors’ meetings (including any modifications)
- Monitoring and reporting on progress until the end of the CVA
Who can propose a CVA?
- The company’s directors
- Where a company is in administration, an Administrator
- Where the company is in liquidation, a Liquidator
This insolvency procedure cannot be proposed by either creditors or shareholders.
What are some of the advantages of a CVA?
There are many advantages of a successful CVA which are not just restricted to creditors but are also of benefit to shareholders and directors including:
- Directors remain in control of the company whilst it continues to trade which protects employees’ jobs
- If successful (or sometimes in the case of early termination), the CVA will result in a better outcome for creditors than other insolvency procedures
- Once approved, there is protection as creditors cannot take further action in respect of debts bound by the CVA
- Following approval, creditors cannot add interest or charges to their outstanding debt
- Comparatively flexible arrangements that can provide tailored solutions, albeit with many common terms and conditions that creditors expect to see
- If the company’s situation changes after approval, creditors can be invited to vote on a variation to the approved Proposals
- In most cases where approved, the CVA should be a cost-effective solution when compared to alternative insolvency procedures
- Unless challenged, a CVA does not involve a court hearing
- No up-front fees
- Supply chains that are crucial to the company might not be disrupted
- Depending on the exact wording, contracts and leases may continue as normal
- At the end of the CVA term, the balance owed to unsecured creditors is written off
Turning to the company, a well-drafted and constructed CVA will improve cash flow and reduce historic amounts owed to creditors.
What are some of the disadvantages of a CVA?
- Difficult or impossible for the company to arrange credit or borrow money in the early years meaning that goods or services may have to be paid for in full on a “pro-forma” basis or cash on delivery
- CVA is on public record which often adversely affects future business relationships as potential customers may not be willing to risk doing business with the company
- Length of arrangement - CVAs are often proposed to last for 5 years
- Disgruntled creditors who voted against the Proposals may see it as unfair
- Failure to adhere to the terms of the CVA is likely to result in a further insolvency procedure (possibly administration, creditors’ voluntary liquidation or compulsory liquidation)
- The drafting of the wording or modifications that had to be agreed for the CVA to be approved may mean that the company has limited flexibility regarding the time frame for and payments that must be made to creditors
- Reticence of creditors to approve CVA proposals unless changes are made to the existing business model, there is new investment or changes in key management positions
- Secured and preferential creditors are not bound by the arrangement unless they so agree
Once approved, what potential action can a disgruntled creditor take?
A creditor’s only form of redress is to make an application to court within the requisite statutory time limits to the effect that:
- The CVA terms are unfairly prejudicial
- There was some material irregularity in the CVA insolvency procedure leading up to its approval
What happens when a successful CVA ends?
On completion, the Supervisor’s role will come to an end and the directors will remain in control of the company. Any outstanding amounts due to creditors (net of payments made to them during the CVA process) will be written off.