In our latest business recovery podcast, the Menzies Creditor Services team discuss the future of the Company Voluntary Arrangement as an insolvency process and the impact it can have on different groups of creditors.
The Company Voluntary Arrangement (“CVA”), was a new insolvency procedure which was introduced by the Insolvency Act 1986 to provide a simple recovery procedure whereby the majority of a company’s creditors could agree a formal arrangement to compromise all creditors’ debts, thereby allowing the entity to continue trading.
Historically the number of CVAs entered into by companies has been significantly lower than Administrations or Liquidations, which we believe is due to a number of factors including the required level of creditor approval, 75% of those voting, for the CVA proposal to be approved, and the stigma regarding the number of CVAs which fail and end up with the company being placed into Liquidation.
However, during the last 24 months, the number of businesses entering a CVA process has been on the rise and seen in news (and the courts) more and more. The majority of the CVAs seen in the news have been landlord only CVAs, where only the debts due to landlords are compromised and all other creditor debts continue to be paid in the normal course. These landlord only CVAs have little impact on trade creditors, so long as they are approved by the required majority of creditors voting.
As the CVA process has been around for a number of years, we have seen the problems that can lead to the failure of a CVA, and where they don’t work. For a CVA to be successful, and allow the company’s business to continue, there needs to be an underlying profitable business, whose current problems and failure have been caused by an identifiable reason, with the COVID-19 pandemic being a clear example.
Many businesses have been impacted by the pandemic and may be suffering from direct cashflow difficulties due to the inability to open for business, or from the knock-on effect from one large debtor who was impacted by the pandemic. These are both clear examples of where a CVA may be the correct option for a company which was previously profitable prior to the pandemic. It is therefore likely we may see the CVA process used by many more companies over the next few years, to enable businesses to get back on track.
With more CVA proposals being issued, creditors need to ensure they carefully consider the proposal pack being put forward, how it may impact them and whether they should be voting in favour of the proposal received. When considering any CVA proposal received creditors should look at how it compares to other insolvency options, whether the company’s cashflow has been fully scrutinised to ensure the busines can survive and what level of contributions are being put forward.
With the impact of the global pandemic likely to impact all businesses in some way, both directors and creditors need to consider which approach is right for them, and it is envisaged more directors will consider a CVA as the best route to overcome current cashflow difficulties to enable their busines to continue trading.
For further information on CVAs, or to discuss any queries you may have, please contact the authors of this article: