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:
- All insolvency processes have an element of stigma associated with them but a CVA, which will result in a better return for creditors and where the company has worked in a collaborative fashion with key stakeholders to help shape the CVA terms, is likely to be received more favourably. Whilst it is too early to say if there is a significant upturn in insolvencies, those who try to rescue their businesses and look after their creditors may face less stigma than others.
- The directors remain in control of the company and so can continue to promote the business for the benefit of all stakeholders.
- Secured creditors may well be more supportive of a CVA than other insolvency processes, particularly where there is a limited underlying tangible asset base to cover their debt as ongoing cash flow may well be the best way for their position to be protected rather than through a sale of assets.
- Landlords may also be supportive of a CVA as it ensures continuity of occupation and so an income stream for them whilst avoiding the holding costs of an empty property for things like security, rates etc.
- Depending on the nature of the business, both debtors and creditors may be supportive if the rescue of the company means there is continuity of supply upstream and downstream in a supply chain and so limiting business disruption for others.
- The directors will typically not face any investigations into their conduct by an insolvency practitioner unlike in a liquidation or administration.
- The directors and shareholders may have accrued tax advantageous ways of being remunerated though the business and these will be lost if, for example, they place the company into administration and buy it back through a new company.
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.
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