What is a Company Voluntary Arrangement (CVA)(UK)?
By Mark Blayney,
a business rescue expert,
Carrshield, Newcastle, U.K.
help at turnaroundhelp co uk
What is a Company CVA?
Company Voluntary Arrangements (CVAs) are one of the Insolvency
Act's business rescue procedures. A bit like Chapter 11 in the US,
they are intended to provide a flexible way of restructuring a troubled
business which will lead to a better outcome for creditors than
other insolvency procedures, while allowing management to retain control and shareholders to retain ownership. This article looks
at the pros and cons of this approach.
What is a Company Voluntary Arrangement?
The starting point for a CVA is the proposal of a deal by an insolvent
company to its unsecured creditors, which will include everyone
owed money such as trade creditors, employee claims and Crown debts
(PAYE/NI and VAT), (but will exclude secured creditors such as its
bankers or asset based lenders). The deal can be anything that the
company thinks is appropriate and deliverable, such as say a payment
of X pence in the pound in full and final settlement, or a standstill
on payments to allow some transaction such as a property sale in
place, or a payment plan over a number of years, or some combination
of these elements.
The offer is sent to the creditors who then vote whether to accept,
reject or amend the proposal. If a proposal is approved by both
75% by value of all creditors who vote, and 50% by value of all
unconnected creditors, then the deal is binding on all the creditors
who were circulated with the proposal. The company's compliance
with the deal is then monitored and enforced by an Insolvency Practitioner
(IP) as Supervisor.
The advantages of a CVA
CVAs therefore have a number of potential advantages for a business
in difficulties as they:
* are flexible as to what deal can be proposed to creditors,
although obviously it has to be one that gives them a better return
than their other options such as an insolvent liquidation, and
the proposed Supervisor, (called the Nominee at this point), has
to agree that the plan appears practical;
* allow, as part of this flexibility, for different deals to
be put to different groups of creditors if this helps;
* allow existing management to remain in charge of the business;
* avoid the disruption involved in an Administration where an
IP will take over the management of the business;
* provide protection for the company against further action in
respect of its old creditor burden while the restructuring is
They therefore provide a mechanism for achieving a solvent restructuring
of the company which enables its shareholders to retain their ownership
of it, and hopefully go on to recover some value, while also offering
creditors a better return than the alternatives, if successful.
The disadvantages of a CVA
So what are the downsides?
When a company proposes a CVA it has to notify all its creditors
that it is insolvent, but it does not obtain protection against
creditor actions until the deal is approved, which allowing for
amendments and adjournments, can be up to a month and a half later
in some cases.
So the company does face a risk that some creditors will simply
step up their recovery action during this period in an attempt to
force payment in full before any compromise deal is agreed. Landlords
who have a power of forfeiture are a particular risk here, but other
creditors may issue winding up petitions, or try to recover stock
under retention of title clauses.
There are two ways to avoid this type of action and obtain protection
prior to approval of the proposal:
* Moratorium - there is a variation of the CVA procedure for
small companies which provides the protection of a moratorium
on any creditor action before the meeting, however this requires
such a level of personal commitment by the IP nominee that very
few are prepared to take these on.
* Administration - appointment of an Administrator also gives
the protection required but will involve an extra layer of costs,
which can be substantial, as well as usually damaging the business
Without their specific consent, secured creditors cannot be affected
by a CVA proposal, so if the business's problems fundamentally stem
from overborrowing then a CVA is unlikely to be an appropriate remedy.
Given the timescales involved, a business may well suffer some
damage in the marketplace during the period leading up to the creditor
meeting as competitors use the news and uncertainty as an opportunity
to attack the company's customer base.
Careful consideration needs to be paid to the future trading plans.
In particular you will normally need to assume that the business
will not be getting any supplier credit, at least to start with.
You will therefore need to ensure it has sufficient cash available
for trading on this basis.
It's also worth noting that a CVA simply helps a business to restructure
its balance sheet. It does not help the business to fix the underlying
problems that have led to the balance sheet problems. So a CVA almost
always needs to be accompanied by a proper business turnaround involving
restructuring what the business does, and how it does it, so that
problems are avoided in the future. One criticism of CVAs therefore
is that in relieving the creditor pressure on management, sometimes
this removes the pressure for tackling the changes required.
So, if your business is thinking about a CVA, is it also worth
thinking about the change process that will need to run alongside
it to take advantage of the opportunity the CVA will provide for
real business rescue?
Of course the information contained in an article like this can
never be a full statement of the legal position as the relevant
laws are complex and liable to change. This article can only therefore
be a general guide as to the issues involved and as these can have
serious implications you should always seek appropriate professional
advice on your own particular circumstances before taking any action.
About the Author:
Mark Blayney is an accredited business rescue
expert and author specialising in owner managed businesses. For
more information on company insolvency or CVAs and related issues;
a free copy of his 13 Key Steps Guide to managing a crisis and a
turnaround; or a free referral to a local expert, contact him at:
Published - August 2010