Company voluntary arrangements (CVAs) are an insolvency process, specific to the UK. It is a debtor-in-possession process with minimal court involvement whereby the directors of the company stay in control of the business.
The purpose of a CVA is to allow a company to negotiate with unsecured creditors, including but not limited to suppliers, HMRC, employees and landlords, with the purpose to generate liquidity whilst maintaining the business as going concern.
CVAs have been in the press a lot throughout 2018 due to the increase in landlord CVA proposals. Landlord CVA proposals are largely issued by retail and leisure business as these sectors have in general a large property footprint and face pressure on their margins from a number of other external factors (including, rising rents, channel shift, minimum wage and changing consumer preferences and behaviours). CVAs can be a way for companies to restructure cost bases / property footprint.
As it’s an insolvency process, the company must be insolvent or contingently insolvent to be able to implement a CVA, and CVAs must be overseen by an Insolvency Practitioner.
As part of the process, all unsecured creditors are allowed to vote on the CVA proposal and in order to process it must satisfy two criteria:
75% of creditors* who vote must approve the CVA
No more than 50% of unconnected creditors may vote against the CVA
Owing to the potential cost savings and additional lease flexibility, companies may consider CVAs as a tool for cost reduction. However, even if a CVA is approved, creditors may within 28 days of the vote challenge the CVA on two potential grounds, i) “Unfair prejudice” or ii) “Material irregularity”.
Unfair prejudice implies that the CVA treats different unsecured creditors in different ways and whether it is fair depends on the overall effect of the CVA. It is uncommon for challenges on this basis as the evidential burden is high, negative PR and the alternative (liquidation) is in most instances a worse outcome.
Creditors may challenge the CVA on the basis of material irregularity if they can persuade the Court that the procedure for implementing a CVA was not correctly followed. It’s important that any proposal can demonstrate that a CVA process is the best option and will guarantee a greater return than an alternative insolvency process.