Company Voluntary Arrangement (CVA)
– a rescue mechanism
Most businesses are dealing with financial challenges as a result of the COVID-19 pandemic. Many otherwise healthy businesses have been enduring a period of complete loss of revenue. Most will have fixed costs to bear, despite business rates relief, business support grants, the furlough scheme and other cost-saving measures. Unless the company has significant reserves, meeting those fixed costs will leave a hole in the company’s balance sheet.
CBILS or Bounce-Back loans and tax deferral may be helping to address liquidity problems in the short term, but they make the balance sheet hole even harder to fill.
With so many companies in similar positions, there is a general understanding that the balance sheet holes have been mostly outside companies’ control. Deferring and discounting debt may be the only way for creditors to receive even part repayment.
I explain here that a CVA is a flexible tool to restructure the balance sheet of companies with a viable business, but burdened with debt.
A risk currently, is that after 30 September 2020, when the temporary COVID-19 related ban on statutory demands and winding-up petitions is lifted, individual creditors will begin using those procedures again in an effort to collect debts due to them. If companies with otherwise good businesses haven’t been able to generate or borrow the cash to pay those pressing debts that arose during the pandemic, they could be wound up and much of the value of their businesses and assets lost.
Dominic Dumville explains here that a bespoke approach to assisting companies with a healthy business and a COVID-19 problem, could well result in a CVA.
What has a CVA got to offer?
A CVA is a compromise between a company and its creditors in the form of a statutory contract between them, which takes effect if agreed by 75% of the creditors (by value), who elect to vote. A CVA, once approved, binds all creditors, including those who did note vote on it and those who voted against it. There are few limits on what can be agreed, although a CVA proposal must be fair. Typically, a CVA will involve debt deferment over three to five years and some discount on the debt. The alternative, in most cases, is liquidation, cessation of trade and, probably, the piecemeal realisation of assets, all leading to a minimal return to creditors. The company’s contribution to the compromise is often a commitment to pay the creditors out of future profits.
A company that would have been profitable, but for the pandemic, and can demonstrate a reasonable expectation of a return to profitability could be ideally suited to using a CVA as part of its recovery strategy.
Henry Page has produced a more detailed guide to CVAs here.
Do CVAs really work?