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COVID-19 - A pending resurgence in CVAs?

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CVAs or Company Voluntary Arrangements over the last few years have, with the exception of landlord retail CVAs, become less and less popular as a means for rescuing businesses. Could this be about to change with the anticipated fall out from COVID-19?

What is a CVA? 

A CVA at its most basic is essentially a proposal put to a company’s unsecured creditors to pay a lesser amount to those unsecured creditors and typically over an extended period of time. Usually a CVA will last anything from three to five years, during which time the company will build a up a pot of cash, either from surplus cash flow or realising assets, which is then put to one side to pay unsecured creditors a proportion of the debt due to them. The CVA is approved following two rounds of votes by unsecured creditors – the first round requires 75% of all unsecured creditors (including connected creditors e.g. the director) to vote in favour and if passed then there is a second vote where 50% of unconnected unsecured creditors need to vote in favour. Once voted through, the CVA binds any dissenting minority of unsecured creditors.

Many CVAs don’t run their full term and end up failing, with the company having to look at alternate options. This is in part due to the length of a typical CVA terms of three to five years which often causes a drag on the business going forwards.

In recent years CVAs have had a mini-resurgence in the retail space with retailers (and other businesses operating from multiple leasehold sites), who have a large leasehold estate, using CVAs to reduce their rent roll by seeking to reduce rents and/or vacate underperforming sites. For most businesses they have been used far less frequently. However, the COVID-19 pandemic will inevitably see many companies that were viable but facing significant financial stress due to the pandemic. Companies will be facing a significant reduction in their cash flow whilst still building up debt, and in some cases potentially significant debt, whether that’s to HMRC, landlords or indeed through taking out additional funding. Some companies may well find that the debt pile they have built up, through no fault of their own, becomes challenging to service when we come out the other side of the pandemic.

A CVA may well present a viable solution and provide companies with the very breathing space they need to seek time to pay creditors over an extended period and/or seek a reduction in the amount due to creditors. HMRC have already indicated that they will take a more supportive stance in relation to CVAs that are linked to the pandemic and in many cases they will be a proportionality bigger creditor as companies push back payment of PAYE, VAT etc and so could well have a casting vote in many instances. Landlords faced with the prospect of losing a tenant and having empty premises with the associated costs and loss of revenue may well be far more supportive of CVAs as well.

What are the advantages of a CVA?

There are a number of advantages of CVAs particularly where companies use them as a short term solution, i.e. a six -18 month duration to deal with a debt pile built up as a result of the pandemic:

For those reasons, we anticipate that CVAs which last a short period of say six to 12 months, and which relate to companies that are facing financial distress linked directly to the pandemic, may well become more popular as a way of addressing the short term challenges that many will face as result of the pandemic.

Should you want to discuss this or any other issues you may be facing, then please do contact our Business Restructuring and Insolvency team.

Disclaimer: Anything posted on this blog is for general information only and is not intended to provide legal advice on any general or specific matter. Please refer to our terms and conditions for further information. Please contact the author of the blog if you would like to discuss the issues raised.