Company voluntary arrangements

It is probably true to say that only the most desperate of business owners is overjoyed by the prospect of creating a Company Voluntary Arrangement (CVA). Using a CVA can save a business when it might otherwise be forced into administration or liquidation. It may be used within a successful restructuring process. But it is often a gamble, a penultimate throw of the dice; and it should not be entered into lightly. One in 10 companies that entered into a CVA between 2013 and 2016 later went into administration, according to research published by Moore Stephens. High-profile examples of CVAs ultimately failing to save a business have included the retailers JJB Sports and BHS in recent years. So what does anyone considering this course of action need to know or do to improve the chance of a positive outcome?

A CVA allows a business facing immediate serious financial problems to avoid administration or liquidation by negotiating a new arrangement with creditors. It can only be put in place with the approval of the creditors owning 75% of the company’s debt.

In the third quarter of 2016 the number of companies entering any insolvency procedure in England and Wales rose slightly, to 3,633. Only 75 companies entered a CVA during the quarter, down 30.6% on the previous quarter and down 31.8% year on year. Business owners see it as an attractive option because it enables them to retain control. “It’s a lighter touch process than administration: it’s not as intrusive and it also tends to be cheaper,” says Mike Jervis, partner in restructuring and insolvency at PwC.

A company seeking to create a CVA would enlist the services of an insolvency practitioner (the nominee) and engage with at least some of its creditors and put together a figures-based proposal that will explain how, over what timescale and to what extent the company proposes paying off its debts. The proposal is issued by the nominee, who includes an assessment of the proposal and outlines the returns it will give creditors compared to what they would receive if the company went into administration or liquidation.

There is then a 14-day period for the creditors to digest and assess the proposal, during which a meeting is called and creditors decide whether or not to approve it. Even if the plan is approved, a 28-day cooling-off period follows, during which creditors can withdraw their support and take alternative action, such as taking the company to court or putting together a winding up petition.

In the summer of 2016 the government’s Insolvency Service issued a consultation on introducing a moratorium during which creditors would not be able to assert their rights against the company. The company would also be able to designate some contracts with suppliers as “essential”, meaning they could not be terminated or altered during the moratorium. It would probably last no longer than three months and would need to be overseen by a supervisor – although exactly who this would be and who would have the power to appoint them remains to be seen.

Another unanswered question is how and when notice of the start of the moratorium would be given to creditors – who would then have 28 days to apply to court to challenge it before it came into force. In any case, the political upheavals of 2016 have delayed the necessary legislation indefinitely.

Under the current legislative regime, in what circumstances does a CVA make sense? “If your difficulties are because you have illiquid assets, you’re facing some sort of litigation, or you need time to dispose of a loss-making part of the business, for example,” Jervis suggests.

“I think situations where CVAs are a good option are those where you have a profitable business that can generate cash and can afford to make the necessary payments,” says Matt Ingram, a managing director at Duff & Phelps.

“An example might be where a previously profitable business has been badly affected by a single event, which has put the business into a financial position that is challenging but is unlikely to occur again.”

It can be tricky persuading those who have been through this process to speak about it on the record, it’s not really something you want to shout about, but also, as someone who knows just how it feels puts it: “You just want to put it behind you.”

But there are plenty of healthy businesses operating successfully today that have been through the process. One slightly disguised example is a small to medium-sized services company that agreed a CVA to repay debts of over £160,000 in 36 monthly instalments of almost £4,500. Following an increase in repayments during the final months of the agreement, the debt was paid in full during the three years.

In another example, in December 2016 the solicitor Just Costs, based in Manchester and London, entered into a CVA with the aim of repaying £829,000 to creditors including landlords and HMRC. In this case, Just Costs has challenged HMRC’s treatment of work in progress as income before invoices have been issued. It has been able to negotiate terms with the taxman that will hopefully enable it to keep trading while it pays off the debt in full.

A company considering a CVA must be realistic about what can be achieved, says Jeremy Willmont, head of restructuring and insolvency at Moore Stephens. “You’ve got to ask yourself, is it really a business that can be rescued?” he says.

The business must then engage carefully with its creditors. “You have to be confident that you are going to get their support,” says Ingram. “Transparency is always important. The more that suppliers understand why they’ve been asked to enter into a CVA, the better.”

“It’s a negotiation based on full disclosure of the company’s true position,” agrees Stuart Frith, partner at Stephenson Harwood and deputy vice president of R3 (the Association of Business Recovery Professionals). “The agreement is likely to fail if directors assume this is a way of allowing the business to carry on as before. A genuine desire to make serious changes to the business is crucial to success.”

If you are a creditor of a company whose approval is sought for a CVA, here is some advice...

“Engage with the company as quickly as possible, if possible even before a proposal is sent out to the creditors,” PwC’s Mike Jervis advises. “But if you’re not in that group of creditors who might be consulted beforehand, probably the best thing to do is speak to your accountant and your auditor.”

It may also be worth consulting your credit insurer to check that your actions will have no adverse consequences for your credit insurance.

The first step any creditor takes should be to examine the sections of the CVA proposal that show likely outcomes compared to an alternative course of action. Often the alternative used for comparison is liquidation, although the potential consequences of administration may also be illustrated.

Creditors should also be asking some fundamental questions before approving a CVA, says Jeremy Willmont of Moore Stephens. “What’s changing about this business?” he asks. “How is the business going to get back on an even keel?

The creditor shouldn’t just ask if the outcome for them will be better if the CVA goes ahead than if the company goes into administration, says Willmont.

If you take the view that the company may be putting a gloss on its current position the question should be, is it better to encourage the company to go into administration now, or to look on as the CVA fails and it goes into administration in one or two years’ time?

Martin Kirby is head of order to cash at construction company Kier Group, which has often been a creditor in these situations. He says the company’s default position is to treat CVAs with caution. His advice to any creditor presented with a CVA proposal would be to apply three tests to the company in question: look at the company’s likely cash-flow situation in future; look at its balance sheet; and also check there have not already been legal judgements filed against the company. “We’re happy to support CVAs as long as those validity tests can be passed,” he says.

There are other factors that make the CVA look less attractive to Kier: a longer term agreement, stretching out beyond a couple of years; and agreements that will be setting different repayment terms with a number of different creditors. “Even if it is feasible for the company to do that, they may find they cannot control it,” he suggests.

One major advantage that a CVA offers is flexibility. “There are some things you can’t change, like the fact that you can’t compromise the rights of a secured or preferential creditor without their consent, but otherwise it can be as creative as you want,” says Jervis. This can be useful in terms of time: providing enough time for an agricultural business to sell some land and so acquire some additional liquidity, for example.

In addition, companies can apply the CVA to as many or as few of their suppliers or creditors as they wish, provided they are supported by the owners of 75% of the debt. This is a situation where some creditors – such as suppliers without whom the business simply cannot function – are more equal than others. The problem may be in persuading the other creditors to accept this.

Even if they do, anyone considering using a CVA must bear in mind how going through this process could affect any of its supplier relationships. “Often we find that creditors may not still offer the same credit terms they offered pre-CVA,” says Ingram. “You must have realistic assumptions about the terms your creditors will agree to.”

Companies also need to consider the quality of the relationships they already have with those creditors. “If there’s a track record of taking advantage of creditors the CVA proposal is going to be treated with scepticism,” Willmont warns. And perhaps the biggest sceptics of all work for the one organisation included in almost every CVA: HMRC. “If they’re owed a lot of money, try to get a dialogue going,” advises Willmont.

But above all, the CVA functions as a framework for deal-making. “Be flexible,” says Willmont. “If you are prepared to change things then suppliers may be more willing to support the business.”

Alternatively, you may have to bite the bullet and admit that you need to look for other options. “You’ve got to get rid of the rose-tinted spectacles and have a cold, hard look at everything,” says Willmont. “Sometimes you have to think about staffing or whether a particular market is still profitable. You may find there isn’t any chance of survival, in which case, ask yourself if the company would be better off going through a sale to someone else.”

“CVAs are quite appealing to management because they retain control and the business doesn’t go into administration or liquidation,” says Ingram. “But they will change your relationship with your suppliers. You need to think very carefully before you decide a CVA is the right course of action. Once you put proposals out there you have changed your relationship with your suppliers, regardless of whether the agreement is approved or not. Have a plan and be aware of the pitfalls.” You must listen to and take on board advice before you make any final decisions.

• Company voluntary arrangements
  Finance & Management Magazine, January 2017, p.14-17

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