Thriving Through Recovery
We are out of recession. It’s official. But for a number of businesses, it doesn’t feel like it. The economy may be venturing into positive growth territory, but its steps are tentative. A number of companies are still experiencing bad debts as customers fall into insolvency. Other businesses which have held on for the last 18 months, now find that they cannot take advantage of the beginnings of the recovery simply because they are carrying too much debt and can’t put their hands on the capital they need to flourish. However, companies who find themselves in trouble as a result of a ‘one off’ hit – say, a substantial bad debt, or the loss of a major customer, can restructure using a little known insolvency procedure, the Company Voluntary Arrangement or CVA.
Essentially, a CVA is a contract or deal between a company and its creditors which proposes a compromise of the company’s obligations. Basically, it involves making an offer of settlement to creditors, usually of around 25p to 30p in the £. However, the contract has a number of unique features:
- the proposed arrangement cannot vary the rights of secured or preferential creditors without their consent
- BUT it CAN bind creditors who do not agree to it under certain circumstances
- And there must be a certain minimum return to ordinary creditors
Most importantly, unlike any other UK insolvency process, the directors remain in control throughout the entire procedure.
So, how would you go about putting a CVA in place?
The first thing to do is to consult an insolvency practitioner (IP). Why? Because the law requires that the directors appoint an IP to act as a ‘Nominee’ and it is the Nominee’s job to put forward the Directors’ proposal to the company’s creditors. Your insolvency practitioner will help you draft the proposal and will put it forward to the company’s creditors if he/she considers that it is reasonably likely to be both accepted by the creditors and to be achievable. The directors remain responsible for achieving the key milestones which will make the deal work- whether it be cost cutting, relocation, boosting sales or whatever – it’s down to you to deliver .
So what would a proposal for a CVA actually look like and what would it contain?
By nature, since the company is asking its creditors to write off some of the money which they are rightfully due, there is a requirement to make full and frank disclosure of the company’s financial affairs. So as well as details of its assets and liabilities, creditors should expect to receive some information about the background to the company and its current difficulties , as well as financial projections – cash flows, forecast P&Ls etc – to allow them to assess whether the company is fundamentally sound or has a reasonable prospect of survival in the longer term.
If the company doesn’t have strong internal financial capability, it can call on the FD centre or its own accountant for input and help to strengthen that capability for the longer term.
So under what conditions would a CVA be the right tool to restructure?
I use the following 10 questions when trying to assess whether a CVA is appropriate or likely to be successful:
- Is there a profitable core business?
- Does the business have up to date financial information?
- Is there a business plan for the next 12 months?
- Is the plan realistic?
- Is the management capable of dealing with the business plan?
- Are resources available to meet the immediate cash flow requirements?
- Are major creditors likely to support a rescue plan?
- Is any litigation pending?
- Can I trust management?
- How much luck will we need to make it work!
If you think you could use this tool to restructure your business and help it thrive through the recovery, please contact Maureen Leslie or Antonia McIntyre at MLM for further information.
Maureen Leslie, Director. mlm cps limited
3 Michaelson Square. Livingston, EH54 7DP
t. 01506 465 205 Visit: www.mlminsolvency.com