A solution to insolvency

Meeting the demands of your creditors is tough, so a voluntary arrangement procedure could be the best way forward.

But for many directors the prospect of looking their creditors in the eye is too awful to contemplate, which perhaps helps to explain why the UK sees so few company voluntary arrangements, or CVAs. These are similar to Chapter 11 bankruptcy in the USA, but while most British businesspeople are familiar with the latter, few understand or are even aware of CVAs.

“A CVA is essentially a deal between an insolvent company and its creditors,” says Keith Steven, managing director of corporate recovery specialist KSA Group.

“The CVA places a legal ringfence around the company and stops creditors attacking it. This allows a viable but struggling company to repay some, or all, of its historic debts out of future profits, over a period of time to be agreed – usually three to five years.”

Crucially the directors remain in control – unlike putting the company into administration – giving them the chance to turn the company around and return it to profit. Indeed a good turnaround plan is essential in securing the consent of major creditors such as HMRC, says Steven. Change must be part of the restructuring plan.

“Agreement must be reached with a 75 per cent majority of the creditors who vote, so CVA is seen as an equitable arrangement,” says Steven. “We find that more than nine times out of 10 they do agree, because we can convince them that this is the best deal available and management will be making changes.

“It’s important to involve all stakeholders from an early stage, including shareholders, staff, pensioners and customers as well as creditors, so we talk to them all. Banks will generally consider CVAs, too, because they offer the prospect of seeing the debt serviced and ultimately repaid, rather than the bank having to write off assets it may not be able to sell.”

Safety net

A CVA clears the balance sheet of unsecured debt, in return for paying unsecured creditors an agreed percentage. Cases vary, but his average is around 40p in the pound, says Steven. “A common misconception is that you have to agree to repay 100 per cent, but you don’t.”

Most CVAs include a profit ratchet enabling creditors to claw back more if the company performs better than expected – an example of the flexibility of CVAs compared with insolvency or administration, says Steven.

Further flexibility allows the CVA to be wound up early by mutual consent if the company can raise the cash. “We can say to creditors, ‘Why don’t we pay you 35p in the pound now rather than 50p in 3 years time’” says Steven.

Early termination helps mitigate one of the drawbacks of CVAs, the fact that the company cannot obtain a credit rating, adds Steven. Other benefits include enabling the company to terminate contracts without penalty, such as unwanted leases, and having the cost of any redundancies met by government, so it becomes easier to drive CHANGE ,streamline the business and return it to profit.

Cheaper alternative

CVAs are much less prescriptive than administration, and cheaper, too, since the company is run by its directors and not expensive staff from the administrator.

The CVA model can be suitable for any business of at least £200,000 turnover and generating regular cash flow, including manufacturing, services and professional firms, says Steven. Successful CVAs have included Oddbins, Blacks Leisure, Portsmouth FC and even the £6bn power giant TXU Europe.

Yet CVAs are woefully underused. Last year there were fewer than 750 in the UK, compared with c20,000 insolvencies.

“There could easily be 5,000 successful CVAs in the UK every year,” says Steven. “That’s 5,000 extra companies that could be contributing to the economy by providing employment, generating revenue and benefiting their creditors. All you need is the will to do it and the support of a flexibly minded insolvency practitioner.”



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