Company voluntary arrangements (CVAs) have been around for 25 years, having been introduced by the Insolvency Act 1986. They are designed to be an alternative to insolvent liquidation for companies who cannot paying their debts on time.
The best way to think about a CVA is it is essentially a contract between the creditors, shareholders and company, whereby creditors give up something – typically agreeing to write off part of their debt, but can be to accept payment(s) over an extended period of time – in return for promises made by the company and its shareholders – typically to pay a proportion of the company’s profits into the CVA ‘pot’ for distribution on to the creditors and manage its affairs within the limits set out in the ‘contract’ for a period of time. Really, it is a procedure only for businesses that are viable, that have hit a one-off problem. A CVA is not just a mechanism for giving you the directors another opportunity to continue the business as it was carried out before, with no changes, having been relieved of debt that can’t be paid. Something major, often a lot of things, have to change.
So what are the advantages of CVAs?
- The survival of the company – most other insolvency processes see the company die;
- Higher returns to creditors than liquidation as a result of selling the business as a going concern or profitable trading;
- Lower insolvency procedure costs than compulsory liquidation because there are no Secretary of State fees;
- Lower insolvency procedure costs than creditors voluntary liquidation because the directors retain control, the IP and his staff have only limited involvement, they are not responsible for managing the business;
- Capital gains tax advantages – gains on the disposal of assets can be set off against earlier losses;
- Section 245 of the Insolvency Act 1986 is not triggered, therefore recent floating charges will not be invalidated;
- As CVAs bind all creditors who had notice of and could vote at the creditors’ meeting, ‘difficult’/’aggressive’ creditors can be bound by the more ‘friendly’ creditors;
- A moratorium is available, similar to that in administration, but only to ‘small’ companies, stopping many debt collection actions against the company;
- The powers/duties that liquidators and administrators have do not extend to Supervisors of CVAs:
- The Supervisor cannot submit a report to the government under the Company Directors Disqualification Act, directors cannot be banned under the CDDA;
- The Supervisor cannot bring proceedings for wrongful trading, transactions at an undervalue, preferences, or misfeasance. However such potential actions have to be reported in the Proposal so that creditors can make an informed CVA v Liquidation comparison, but no actual action can be taken if the CVA is approved.
- CVAs can be a less visual way of dealing with a company’s financial problems than insolvent liquidation and administration because other than writing to creditors, there are no general notice provisions, no advertising in the London Gazette or notices or reports lodged at Companies House – this can help preserve the business.
What are the Disadvantages of CVAs?
- As above, 9b, the Supervisor has no power to claw back assets – this might depress distributions (but a commercial decision is made, see above);
- If the CVA fails, liquidation will probably be the only route left;
- A moratorium is only available to small companies – this can leave larger companies exposed, or can make administration – a costly process – a necessary earlier process for larger companies;
- Going into CVA may bring a reduction in credit facilities – you cannot force suppliers to extend you credit;
- Secured and preferential creditors must themselves give their own specific consent to any modification of their rights, because the unsecured creditors’ vote does not bind them;
- CVA failure rates are high. In Mid 2019 a government briefing paper on CVAs reported that almost two thirds of the CVAs that were put in place in 2014 had failed.
What’s the first step to putting a CVA in place?
It is for you to work with me as the proposed ‘Nominee’ to formulate and put a ‘Proposal’, including a Statement of Affairs, to the creditors – this is because the Proposal is yours, as a director of the company.
How do you apply for a CVA?
First off, you, as director, can apply for a CVA as long as:
- The company is not in administration;
- The company is not being wound up;
- There is no administrative receiver in place;
- There is no provisional liquidator in office;
- There has been no administrator in office or a moratorium in force in the previous 12 months.
So what do I do as IP and why, early on?
Prior to the CVA being agreed by creditors, I’m called the ‘Nominee’. My job – which is one that only a licensed insolvency practitioner can do by law – is to balance the interests of the creditors and the company by carrying out an independent, objective, review and assessment of your Proposal.
In practice, it is me that both prepares the Proposal with you then forms a view on it. Once prepared, and you as directors are happy with it, I have to submit a report to the court, advising whether, in my view, it’s a fair and reasonable Proposal that I think should be put to the creditors for their consideration.
So, in my report to court I have to say whether the Proposal is:
- Fit to be put to the creditors;
- Has a real prospect of being implemented if agreed (ie stands a chance of being successful);
- Is an acceptable alternative to liquidation or administration (generally brings a better financial outcome for the creditors).
In practice, as long as I am, as a licensed insolvency practitioner, happy with the Proposal, the court will merely rubber stamp it, enabling us to put it to creditors – after all, why should the court prevent us putting something I am happy to contenance to commercial organisations capable of making up their own minds? Once the court rubberstamps the Proposal being put to creditors, I then call meetings of creditors and members on your behalf.
So what’s in the Proposal?
First off, it’s worthwhile remembering that it’s your Proposal as director(s), and that I’m there, in theory, to help you find the right balance, one that, in my opinion, I am happy to put to the creditors.
The Proposal typically (and in some of these must by law) contains the following:
- The type of CVA. Is the CVA a regular payment from out of profits/cash flows, or the receipt of monies from an investor, in an arrangement for the short but full and final settlement of debts, or is it a scheme of arrangement?;
- The background to the Proposal – a history of the company, a summary of its accounts and explanation why the CVA should be necessary;
- A comparison of the likely financial outcomes for creditors and members of a CVA and liquidation (after costs), including an assessment of the ‘Prescribed Part’ – the Prescribed Part is a sum of money that goes to the unsecured creditors, bypassing the secured creditors (only applies where the secured creditors’ charge post dates September 2003);
- A summary and valuations of the assets that are to be realised and/or excluded;
- The amounts to be paid into the CVA, including any that is to come from third parties;
- A summary and estimated value of claims that could potentially be made by a liquidator against the directors and others for such matters as a transaction at an undervalue or preference;
- Any floating charges which can be invalidated under Section 245 of the Insolvency Act should the company go into liquidation (created within two years of liquidation if in favour of a connected party, one year if the party is unconnected);
- The proposed duration – normally 5 years, but could be a lot shorter in the case of an investor introducing money;
- Whether there are any guarantees to be provided by, for example, you the directors or any shareholder(s);
- How is future business to be conducted? This should include:
- The Supervisor is to supervise, but not manage, the business (the directors will manage the business). In addition to the general powers the Supervisor has to implement the terms of CVA, sometimes he can be given additional powers to suit the circumstances;
- Confirmation that the Supervisor incurs no personal liability in his role;
- Duties on you the directors to give me regular management information and accounts;
- Confirmation of the identity of the accountants who will prepare accounts and by when they will be produced;
- An explanation of why you believe the company can be turned around and trade profitably and generate cash going forward;
- The extent to which the company relies on the continued support of the bank, key customers and suppliers and how such support has been or is to be secured.
- What’s the process for agreeing creditor claims and paying dividends? It’s a good idea for the Proposal to say that the established procedures in liquidation be applied in the CVA, including those relating to creditors’ proofs of debt, set-off, discounts, foreign currency claims, and future claims;
- If there are joint Supervisors, what powers can be exercised jointly and/or severally;
- The Proposal must clearly state what constitutes default, what enables or compels the Supervisor to petition for the winding up of the company and what might not be a default but would nevertheless constitute a failure of the CVA resulting in its termination. It is a good idea for the Proposal to give the Supervisor the ability to ask the wishes of creditors in the event of either default or failure, in order to give them an opportunity to simply vary the CVA, allowing the CVA to continue in its revised form. This means the Proposal should also clearly set out the procedure for varying the CVA;
- A Trust Clause whereby the assets included in the CVA (and their proceeds of sale) and cash paid into the CVA are held on trust for the CVA creditors, and not therefore available to meet any excluded debts or those incurred after the start of the CVA. This is important should the CVA fail – thus the excluded debts and those incurred after the start of the CVA are entitled to share only in any assets that were excluded from the CVA and assets that were created since its start – these all fall into any liquidation on any failure of the CVA. Note however that the CVA creditors may submit claims in the liquidation for any debt that remains unpaid after they’ve received any CVA assets/cash.
Finally, it is worthwhile double-checking that the Proposal to ensure it includes all the information the creditors and members might need to reach an informed decision when voting.
Statement of Affairs
A Statement of Affairs has to be produced.
Strictly, like the Proposal, this is your document, but again I work closely with you to prepare it, so it complies with the requirements of the law.
- It must summarise the company’s assets at estimated to realise values, detail the security over those assets, give the names and addresses of creditors and members, and the amounts owed and shareholdings;
- It must be made up to just before the date of the Proposal and you must verify it by a statement of truth;
- You may ask the court to let you omit information from the statement of affairs sent to creditors where its disclosure could prejudice either the conduct/success of the CVA or lead to violence.
Nominee’s report to the court
I have to file in court my report containing my comments on the Proposal. Much of what I have to report on under the law is as if I had no input in its production, for example I must say:
- Whether in my opinion the CVA has a ‘reasonable prospect’ of being approved and implemented?;
- Whether a meeting of the creditors and shareholders should be summoned to consider the Proposal, and give details?;
- Whether the company’s financial position is significantly different from that set out in the Proposal, explaining how much verification has been done?;
- Whether the CVA is fair or ‘manifestly unfair’?
What potential difficulties have to be dealt with?
- Unless, sometimes even if, a moratorium is to be obtained (and a cost whether you’ve got a large or small company), creditors who may be able to take enforcement or other action against the company need to be identified and a strategy devised to deal with them.
These can be:
- Landlords chasing unpaid rent, or who could forfeit the lease;
- The company’s bank – who could appoint a receiver or administrator, or could, if they were to withdraw facilities, prevent continued trading;
- Overseas creditors who may, whether or not a CVA is put in place, take enforcement action in foreign jurisdictions or simply stop supplies;
- Judgment creditors, HM Revenue and Customs and local authorities who may be able to seize assets;
- Creditors petitioning for a winding up;
- Creditors with retention of title, hire purchase or lease agreements.
- All creditors have to be identified and circulated, including ‘contingent’ creditors. Although creditors not notified of the creditors’ meeting are still bound by the CVA they could go to court to ask it to overturn the meeting on the basis of a ‘material irregularity’;
- Are creditors and members expected to vote for acceptance of the Proposal? Sometimes it’s a good idea to hold early discussions of the potential contents of the Proposal well before the meeting(s);
- People /companies intending to put money into the company / CVA pot should seek their own independent professional advice. Adequate time needs to be allowed for this;
- Allowance needs to be made for ‘difficult’ creditors who are likely to vote against the Proposal, seek adjournments and/or modifications, or just simply refuse to continue to supply goods / services on a credit basis post CVA;
- Creditors may appeal on the basis of a material irregularity. You will need a plan for meeting your legal costs on such an appeals;
- In a CVA dependent on future profits / cash generation over time you need to prove to me as Nominee that you have good grounds for believing that trading on will be viable and cash generative. This involves:
- Evidencing the ready availability of adequate funding going forward;
- Preparing integrated profit, balance sheet, and cash flow forecasts, and a business plan which recognises and addresses historic difficulties;
- Cash flows that show contributions into the CVA being paid on time and with some degree of comfort;
- Considers the level of support from management, staff, key suppliers and customers, including whether key customers or suppliers can or will terminate if the company should go into CVA.
- How does the Supervisor deal with unliquidated and contingent claims? – the Insolvency Act contains no guidance.
What happens next?
- Creditors are asked to consider the Proposal via a ‘Decision Procedure’;
- Shareholders are invited to a meeting.
Creditors are asked to consider the Proposal through one of the Decision Procedures’ set out in the 2016 Insolvency Rules, this has to be:
- By correspondence;
- By electronic voting;
- Through a virtual meeting;
Or, if requisitioned by the creditors as a result of voting through one of the above, by a physical meeting.
Here are the relevant rules for the meetings/procedure:
- The shareholders’ meeting takes place after, but less than 5 days after, the creditors’ decision procedure in order to ensure shareholders comment on Proposals after they have been agreed by the creditors.
- The normal, long established, voting rules relevant to liquidations apply;
- In the creditors’ decision procedure, > three-quarters of the votes cast, in £ terms, are required to approve or modify the Proposal. Any other resolution requires just a simple majority. Note the word ‘cast’, ie those who bother to vote.
- At the shareholders’ meeting, a simple majority of the votes cast is necessary, but there is another requirement: there must also be a simple majority of notified, valid, unconnected creditors. It can be important to get unconnected shareholders to buy in;
- Interestingly, the decision of the creditors’ procedure is effective even if the shareholders reach a different decision – but any shareholder can ask the court to overturn the decision;
- Any creditor or shareholder can appeal the decision of the procedure/meeting, but this must be done within 28 days of the Chairman’s report being lodged with the court. If the court considers there to have been some ‘unfair prejudice’ or ‘material irregularity’ it can reverse, vary or confirm the Chairman’s decision or order another meeting to be held;
- The Chairman may (but shall if the meeting says he must, he must) adjourn the meeting / procedure for up to 14 days. Typically, this happens where creditors cannot agree, or need further information or explanations. It is possible to adjourn the meeting / decision procedure, but the final meeting / procedure must be less than 14 days from the original meeting / procedure. Physical meetings, once opened, can be suspended for up to an hour;
- The decision procedure / meeting may propose modifications to the Proposal. Although the law does not require the directors to consent to modifications, my governing bodies’ recommendations say I should report your views on them;
- You, the Chair, then report on the outcome of the voting to the court, members and creditors. If the CVA is approved, the Supervisor has to file the report at Companies House, which contains:
- Whether the Proposal was approved and whether there were any modifications;
- Details of the resolutions taken and the decisions made;
- A list of creditors and members who voted (with their values) and how.
How do you get a moratorium?
You can apply to the court for a moratorium if your company is ‘small’.
The definition of ‘small’ is:
- Turnover is under £10.2m pa;
- The Balance sheet total is (assets less liabilities) is under £5.1m;
- The average number of employees is under 50;
And the company is not part of a larger group.
What’s the effect of a moratorium?
- No petition can be presented for winding up nor a winding up order made;
- No meeting of members can be called and no resolution passed for a winding up;
- No petition for an administration order can be presented;
- No administrative receiver can be appointed;
- No enforcement of security or repossession of HP goods;
- No other proceedings, execution or legal process can be started or continued.
During the moratorium, the company’s notepaper must state that the moratorium is in force and the company may not obtain credit of £250 or more without disclosing that a moratorium is in force. Note that I have, as Nominee, to advertise the moratorium on the London Gazette.
When does the CVA come into effect?
The CVA comes into effect when the Proposal has been agreed by both the shareholders and creditors, and as from the date of the creditors’ decision procedure.
What do I have to do after the Proposal has been agreed?
- My title changes from ‘Nominee’, I become the ‘Supervisor’ of CVA;
- My responsibilities as Supervisor are to ensure that the CVA takes place as anticipated in the agreed Proposal – ie as the Proposal put to creditors / members and amended by any ‘modifications’.
Typically in a profit based CVA this is to:
– receive money from the company in terms of monthly / quarterly payments out of cash generated by the company and any annual top ups out of ‘excess profits’;
– agree creditor claims and pay out distributions, net of my costs and fees.
In a CVA which is based on an investor coming in with cash in return for creditors taking some pain, my role will be shorter in terms of time, possibly only months, as opposed to years in a profit based CVA. My role then is to receive the investor’s money, agree creditor claims and pay out a distribution;
- I have to prepare an annual ‘Progress Report’ soon after each anniversary, and a final report. These reports have to go to members and creditors that are subject to the CVA, the court and Companies House – the reports are freely available to the people you deal with directly from me if they are involved in the CVA or if not, indirectly by their interrogating the Companies House website. Following any early termination of the CVA I must also report to the same people.
If there should be some default in the CVA, I have duties, as set out in the Proposal, which can include bringing it to an end by petitioning for the compulsory liquidation of the company.
What do you do after the Proposal has been agreed?
- Manage the business within the restrictions included in the agreed CVA.
These restrictions typically include limits over the extent of capital expenditure and asset disposals without first obtaining the Supervisor’s approval; the prohibition of dividend payments to shareholders while the CVA is in place; restrictions over the incurring of some new forms of credit without the Supervisor’s approval, etc – ie typically the requirement is for the directors to carry on the business as near normal as possible, without exposing the creditors or the CVA to any increased risk or major increase in debt.
- Pay across cash contributions into the CVA pot held by the Supervisor on time, as set out in the agreed CVA.
- Produce regular reports and accounts to me as Supervisor so I can monitor how the company’s actual results and financial position compare against the forecasts on which the CVA is based and that the directors are complying with the CVA terms (see 1. above).
What happens on the successful completion of the CVA?
- I submit a report to the creditors, members, the court and Registrar of Companies, advising of the satisfactory completion of the CVA;
- I issue a Certificate of Completion – a bit like an Examination Certificate saying ‘well done’.
- I seek my release from office, seeking the majority required in the original Proposal.
And that’s how CVAs work!
Approximately 400 companies go into CVA each year. To put that into context, each year 12,000 companies go into creditors voluntary liquidation, 3,000 into compulsory liquidation, 2,000 into administration and just one into administrative receivership! They remain a small, but when the circumstances suit, vital part of the tools available to insolvency practitioners to solve companies’ financial difficulties. However, their high failure rate is a concern – this, I believe, is a result of life during the typical 5 year agreement being so unpredictable in our fast-moving, complex, world.
If you’d like some advice or support with regards to a potential CVA, either call Paul on 01902 672323 or email him at firstname.lastname@example.org.