A Company voluntary arrangement or CVA deal is based on preserving the company, protecting cashflow, rebuilding sales and profits and then paying debts back over an agreed period. Directors remain in control of the company, personal guarantees don’t usually get called in and your business is given a fighting chance to survive.
If a company can be viable in future, but current pressure is mounting, A CVA is often the solution. If a company is insolvent the directors must aim to maximise creditors’ interests – by continuing to trade and pay back debts they are maximising their interests with a CVA.
If a company has a viable future, the directors and management accept the need for change within the business, are prepared to fight for its survival, and the appropriate funding can be found, then a CVA is a very powerful tool. Be prepared – it is a tough fight and it is harder than liquidating the business. However, by proposing a CVA the company is demonstrating that it is trying to maximise creditors’ interests.
If the CVA does work, then the company will be profitable and valuable for the shareholders.
Who can propose a CVA?
A CVA may be proposed by the directors of the company. When the company is either in liquidation or administration, the liquidator or administrator can propose a CVA. A CVA can only be proposed if a company is insolvent or contingently insolvent.
Here is a time-bar summary of the CVA process: Just click on the image to get a fuller picture. In practice it often takes 7-10 weeks although the summary below is possible IF all of the required information is available from the outset.
1. The directors appoint advisors, such as turnaround practitioners or an insolvency practitioner (IP) to assist in the construction of the proposal. During this “hiatus” period the company should not materially increase or decrease debts to any creditor, suppliers should be paid for supplies made (not always easy!) and activity of the company continues.
2. A review of the company, its people, markets and systems must be undertaken. This is an important part of the process. Typically the CVA will include a detailed 3-5 years worth of financial forecasts to help the creditors to make their decision to support the deal or not.
3. Once the draft proposal is ready the directors will typically review and refine it and agree that the proposal is appropriate, achievable, and maximises creditors’ interests. If the directors do not believe that it is sensibly structured, or that the process has highlighted weakness in the business, then it is advisable to close the business.
4. Once the final CVA drafting has been completed, the directors should then discuss the position with the company’s secured creditors. The bank will want to see how the company will repay the bank’s debts. This should be included in the outline of the document – The bank may not agree with the suggested secured debt structure but will usually be open to negotiation with the directors and their advisors.
5. During the CVA production or hiatus period, current assets such as WIP and debtors are collected and turned into cash, which should improve liquidity. This can be used to fund the difficult period between appointment of CVA advisors and the filing of the document at the Court.
6. The CVA proposal is then filed at court, only to ensure that the proposal is ratified and carries a legal originating number. It is then printed and the proposal is distributed to all creditors. The court does not have an active part to play in this process but the CVA proposal sent to creditors must be a true signed copy of the document filed at court.
After the proposal is completed:
1. The proposal must then be sent to all creditors, who then consider it for the minimum notice period as above before the creditor’s meeting can be held. This is usually held at an independent venue (theoretically at the convenience of creditors).The HMRC team, called the Combined Voluntary Arrangement Service, prefers to have up to 3 weeks to consider the proposals.
2. The meeting will be chaired by the advisor or an insolvency practitioner (IP). Creditors are often represented by technical professionals from other insolvency firms. The aim of the meeting is to allow the creditors to question the director’s proposals; however it is NOT a place for settling disputes.
3. At the meeting, the creditors vote on the proposal and the proposal will be approved if a majority vote of 75% by value of the total value of creditors at the meeting (whether in person or by proxy) vote in favour. A second vote, excluding connected creditors, is taken and provided that not more than 50% of creditors vote against the proposal, it is approved.
4. The chairman controls the ability to vote, and provided creditors have been asked to consider a sensibly structured deal, almost all proposals are accepted by creditors. The creditors may wish to modify the proposal – once again, the modifications need to be approved by the majority votes (see above).This often done by HMRC to ensure future debts are paid on time and future filing of tax returns is done correctly. Occasionally, other creditors may ask for a modification to the proposal.
5. At the same time as the creditors meeting, the members (shareholders) meeting is held. Members decide whether to accept the proposal as made or modified and a vote of 50% in favour is required.
6. If both meetings approve the proposal, the meetings close. The chairman must then issue a chairman’s report, within 4 days, to all creditors and the court, stating what happened, who voted and how they voted.
7. Once approved, all notified and included creditors are legally bound for the debt “frozen” in the proposal. No further legal action (except by leave of court) can be taken against the debtor company, and the creditors will receive dividends from the supervisor as described in the proposal.
8. After the approval, the company must make the agreed contributions to the trust account administered by the supervisor. Failure to keep up with contributions is deemed a default and the company voluntary arrangement can be “aborted”. This usually leads to liquidation.
9. In our opinion, the best way to avoid this is to structure the deal on the following basis. Prudent forecasts of directors should be further scaled back and modest forecast profits should be used as the basis for contributions BUT i) No more than 50% of profits after tax and debt repayments over the deal period should be contributed. ii) Contributions should be stepped to match profits achieved. iii) Any lump sum contributions during the currency of the CVA should be avoided where possible. iv) The use of a profits ratchet allows higher repayments if modestly forecasts profits are exceeded.
Even if the approach outlined here leads to small repayment levels of 20-50% to unsecured creditors, the creditors usually prefer sensible contributions to hopelessly optimistic forecasts. Provided the company conforms to the CVA proposal and makes its contributions, then the CVA continues for the agreed period. The supervisor is generally not involved in the business. THE DIRECTORS REMAIN IN CONTROL. If the company is not performing well and yet it would still appear to be viable, then it is theoretically possible to reconvene the creditors meeting at any time to ask the creditors to consider amendments. If the Supervisor has concerns, he can also ask the court for directions. In most cases the directors should inform the supervisor if there are any material changes to the company or its business.
What happens at the end of the CVA period?
Once the agreed period is completed and the supervisor has issued a completion certificate, then the company leaves the CVA state. Any remaining unsecured debts (where partial repayment was approved) are written off and the directors continue to run the business for the shareholders. Now having read all of this don’t you feel better? If so, that’s the first step to fixing your business problems. Call now or browse this site for other ways to leave the misery of cashflow problems and insolvency behind you… You did really save my life/family, without you I would now be bankrupt and have no family home! I’d be 46 years old and skint (and no motorbike)! You gave me and my staff a fighting chance and you really did deliver everything you promised to us!. I am happy to be a referee for KSA Group “Be like Dylan P, choose your advisors carefully and get the right advice for your business!
Summary of the CVA mechanism.
Clearly, the issues raised above demand that the directors or proposers of the CVA should take expert advice. Before taking advice make sure you understand the company’s position, you have read and understood our guides to the other options available. Then meet with the board if you have other directors, prepare the information you need to present the company’s position and question the merits of each option you think is appropriate. Then choose advisors with care and ask them the following questions
•”How would you structure a CVA proposal?”
•”How many of your CVA’s have been rejected by creditors?”
•”How many CVA’s have included descriptions of the management changes proposed and the cost attached?”
•”Do you have a good relationship with the VAS (Voluntary Arrangement Service)?”
•”Will you give me a detailed recommendations report, of around 15-25 pages, which contains all of your costs for the CVA (in writing) after a detailed 3 hour meeting?”
•”How many CVA’s have you been involved with?”
•”Finally ask the main question…”What is your success rate?”
It is also worth pointing out that the CVA is not a panacea for your company; but it is a very powerful framework for change and protection of a distressed but viable company. In reality although difficult to propose and get approved, getting the CVA approved is the easiest part of a rescue/turnaround– making a turnaround work is much more difficult and needs professional help. Remember the CVA should aim to:
• Maximise creditors’ interests.
• Preserve viable but distressed businesses.
• Preserve economic activity and save jobs.
• In time return value to the creditors.
• Provide a real prospect of a return for shareholders.
Click the following link for more information on the company voluntary arrangement procedure