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Company Voluntary Arrangements: a success story

Our Corporate Advisory Services team applied its cross discipline restructuring, tax and corporate finance expertise to assist a client to restructure its operations in the face of debts in the region of £3m. In addition to creditor pressure, the business faced the threat of losing several service contracts which would not only give rise to significant claims against the company, diluting the return to creditors, but would leave the business with a much lower and unsustainable level of income.

Having worked closely with the board to assess the company’s financial position, an initial Time-To-Pay (TTP) arrangement with HMRC was agreed, and replacement finance was sourced to cover an exiting secured creditor.  Ultimately the pressure told and cashflow forecasts identified that the company was expecting to breach the TTP, which would prompt HMRC to commence winding-up proceedings if no action was taken.

Acting proactively, we were able to advise the directors in relation to their potential exposure to wrongful trading, to assess the options available to the company and ultimately assist with the drafting of a CVA.  It was identified that the CVA could provide the break in creditor pressure and release of cash to implement the reorganisation the directors knew was necessary. A decentralisation of operations, moving from cost centres with centralised overhead, to regional profit centres incentivised to maximise profits and generate additional income, freed local management to realise the potential at a regional level delivering increased profits centrally.

The CVA therefore needed to include an incentive structure for the regional managers which would be palatable for creditors in order for the reorganisation to deliver the benefits which would allow budget forecasts to be achieved. The reduction in head office cost also provided a significant saving to the bottom line.

After reviewing the financial forecasts, and setting out a detailed explanation of the reorganisation and revised corporate structure, the draft CVA was delivered to, and approved by, the board for circulation to the creditors. In order to provide an incentive to the directors and management, the CVA included a ‘profit-pool’ equating to 15% of the profit after tax from which local management may receive bonuses if budgets are met and the agreed return to creditors achieved. The profit-pool increases where budgets are exceeded and the duration of the CVA period will reduce if payments can be accelerated, resulting in the early repayment of creditors.

With 14 days’ notice of the creditors’ meeting to consider the approval of the proposals, there was a period during which creditor expectations had to be managed, requiring the business to operate on a cash basis so as to maintain operations but not incur new credit. The company continued to trade through the notice period and over 98% of creditors approved the proposal. The company has enjoyed the support of the existing secured creditor which has continued to provide invoice discounting. In addition, HMRC approved the CVA. The formulation of the CVA and the information provided to creditors clearly set out why the CVA was desirable, realistic and achievable.

The company continues to trade, has retained its service contracts, complied with the terms of the CVA, and continues to work with its accountants to ensure ongoing compliance with the provision of management and annual accounts as set out in the CVA proposal.

Conclusion
CVA’s offer the potential for genuine restructuring, approved by the creditors, while directors and shareholders retain control of, and a financial interest in the ongoing entity. The terms of a CVA are bespoke to each client’s circumstances, and anticipate a return to creditors which will exceed that they may otherwise reasonably expect. There are clearly difficulties with proposing a CVA, for example winning the support of secured creditors, ensuring that the creditors approve the proposal and continuing to trade through the notice period. However a well drafted proposal will minimise the disruption caused to the business and will maximise the prospect of continuing trade and professional relationships.

Our focus is on preserving, protecting, and maximising value which is often best achieved through the continuation of trade. Where this can be achieved without the necessity of a formal insolvency process we will work to achieve a pre-insolvency solution. However, where circumstances conspire to prevent a solvent turnaround, a CVA is a flexible and proficient tool to be used in delivering value to all affected stakeholders.


For more information or advice, please contact Henry Page or a member of our Corporate Restructuring Advisory team.

 

 

Date: 20th July, 2017
Author: Henry Page

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