Restructuring & Turnaround Advice
Formal Insolvency Appointments
Company Voluntary Arrangement “CVA”
A flexible process which is essentially a contract between a company and its creditors to set aside debt in such a manner that allows an eventual greater return to creditors, albeit often over time, than they could expect in a Liquidation.A proposal is prepared within a statutory framework that needs to be approved by the company and its creditors as must any proposed modifications to the original proposal.
In practical terms, before a CVA can be proposed the following criteria must be satisfied:-
- The return to creditors must be demonstrably better than in an alternative insolvency process (a comparison will be provided as part of the proposal) and within a comparable time scale.
- It must be demonstrated that the cause of a company’s financial difficulty has been addressed and is unlikely to be repeated.
- The support of key creditors should be obtained and agreement reached with key suppliers over credit terms following the CVA’s implementation.
Generally, a CVA will either be contribution based e.g. £5,000 per month for five years, or a lump sum can be paid often from a third party to enable a prompt distribution. The former are more common and, with the agreement of creditors, provision can be made within the proposal for an early termination if the contributions are paid in advance.
The essential advantages and disadvantages of a CVA are as follows:-
Advantages
- No disruption to customers.
- Potentially huge cash flow benefits.
- Secured creditors and financiers generally remain outside of the Arrangement and are therefore likely to be supportive.
- Retention of trading record.
- Not advertised (but is noted at Companies House).
- Employees made redundant will claim in the CVA.
- Shortfalls to landlords and finance creditors will also rank in the CVA.
- Retention of tax losses.
Disadvantages
- Any creditor owed 25% or more of the overall indebtedness can effectively dictate terms.
- Suppliers may be unwilling to offer credit terms at least in the short term.
- Trading terms may need to be renegotiated to ensure support of the company’s proposal (i.e. discounts may be lost).
- Finance company creditors may be unwilling to participate and terminate their agreements.
Geoffrey Martin & Co. LEEDS T. 0113 244 5141 LONDON T. 0207 495 1100 E. info@geoffreymartin.co.uk