What’s the future for Company Voluntary Arrangements (CVAs)?
Despite the Company Voluntary Arrangement (CVA) procedure having existed for over 20 years it has, until fairly recently, remained rather anonymous. The principal reasons for this were a general unwillingness of creditors to support CVA proposals together with the increasing popularity of ‘pre-packaged’ administrations following the Enterprise Act 2002.
However, the contrasting fortunes of two recent CVA proposals may well demonstrate what the future holds for this type of arrangement.
Footwear chain Stylo Barratt put forward a proposal to its creditors in February 2009 which was ultimately rejected resulting in the company appointing administrators. Conversely, the sportswear chain JJB Sports presented a proposal to its creditors just two months later and it sailed through with 99% of voting creditors balloting in favour. So why did JJB succeed where Stylo failed?
The answer lies with the landlord. There was a view amongst Stylo’s landlords that the proposal was weighted too heavily in favour of the company. Their fear was that if they consented to this proposal they would open the floodgates to similar CVAs, which could ultimately have a huge impact on investment values. The problem with this view, of course, is that landlords can expect to receive even less where a company appoints administrators and is subsequently wound up.
Paradoxically, the stance taken by landlords during the Stylo CVA seems to have been the stimulus for the success of JJB. Aside from the rather cynical view that the acceptance of the JJB CVA was nothing more than a reaction to public criticism over Stylo, the fact is that JJB understood the need to get landlords on side early if the CVA was to attract any support amongst its creditors.
Indeed it was generally accepted amongst landlords that JJB’s proposal was much more attractive to them not least because it balanced the needs of the landlord, tenant and other creditors with greater success. However, this is notwithstanding the argument that landlords may have realised that a tenant in CVA may be more attractive than no tenant at all.
The contrasting fortune of Stylo and JJB serves to demonstrate that, despite the failure of others, CVAs can work if they are attractive enough to all parties. This is true not only in retail cases where the landlord is king, but in other CVA situations whether it be a construction company struggling to pay its trade creditors or a media firm having difficulty meeting its VAT. A CVA can offer real benefits in the right scenario, giving a company time to pay debts while putting the business in a better position to carry on trading and saving jobs.
The increased prominence of CVAs is of particular relevance as the Government and the Insolvency Service are currently consulting on various aspects of the CVA regime, including provisions on:
an absolute priority status over all other creditors to any new funding provided to companies in CVAs; and
extending the moratorium on creditor action against a company trying to agree a CVA to medium and large companies(upon the basis that the lack of moratorium has long been considered a hindrance for companies opting for a CVA).
Should these CVA positive measures be enshrined in law it would be an additional boost to the popularity of the CVA. Furthermore the high media profile of CVAs such as Stylo and JJB – along with an increased understanding of the requirements for a successful proposal – could mean that the often shunned CVA will gain popular acclaim in 2010 and beyond.
What is a CVA?
A CVA is a formal insolvency procedure which enables a company to propose an agreement with its creditors about how its debts are to be repaid, with the ultimate aim of securing the long term future of the business.
Although a CVA can be proposed by a company’s administrator it is more usual for the directors of a company not in administration, in conjunction with an insolvency practitioner (IP), to put forward a proposal setting out the terms of the CVA. The IP will then consider the proposal and submit a report to court detailing whether the CVA has a reasonable prospect of being approved and implemented and if meetings of the company’s shareholders and creditors should be called. Once the CVA is filed at court a nominee is appointed (typically the IP who submitted the report to court) and a meeting of shareholders and creditors will take place.
A CVA requires approval of 50 per cent of the shareholders and, more importantly, 75 per cent of the creditors by value who attend the creditors’ meeting including more than 50 per cent of creditors unconnected with the company.
If approved, the CVA will become binding on all unsecured creditors who either were or would have been entitled to vote at the meeting to consider the proposal, even if some creditors did not receive notice. If approved, the nominee will become the supervisor of the CVA and will oversee it in accordance with the proposals put forward by the company’s directors.
Significantly, the CVA will not affect the rights of a secured creditor who will retain the powers under its security, which may include the right to appoint an administrator, without the specific consent of that secured creditor.
It is possible for small companies who meet certain criteria to obtain a moratorium restricting the actions of creditors but this is only available for a short period, usually until the date of the creditors meeting or shortly thereafter.
A CVA can be challenged by a creditor who was entitled to, but did not receive notice of the proposals or where a creditor is unfairly prejudiced by the CVA. Likewise, a CVA can be challenged on the grounds of material irregularity in the meetings.