Company voluntary arrangements need to be reformed to protect creditors

The rules on company voluntary arrangements, a common High Street insolvency procedure, need to be reformed to prevent abuse of the procedure which allows companies to restructure debt instead of going into administration

Although CVAs made up just 1.8% of insolvencies in 2017, they often involve well-known brands. High Street chains Select, Carpetright, New Look, Prezzo, House of Fraser and Byron Hamburgers have also tried to set up or have put a CVA in motion already this year.

There was also a high percentage of failure, with nearly two thirds (65%) of CVAs terminated without achieving their intended aims, and at the same time there was also a failure to ensure that a contingency plan was in place to  cover the costs of a subsequent winding up in the event the CVA terminates.

A CVA is a statutory insolvency procedure which sees an insolvent company and its creditors agree the repayment of a portion of the company’s debts over a set period of time. The existing management stays in control of the company, while an insolvency practitioner reviews the CVA proposals and checks the terms of the CVA are met once approved.

The research report, Company voluntary arrangements: evaluating success and failure, was commissioned by Insolvency and restructuring trade body R3 into the use and effectiveness of CVAs, and was supported by ICAEW. The research was conducted by  University of Wolverhampton and Aston University.

R3 is now calling for significant reforms of the CVA rules, with a cap on CVA lengths, more time for companies to plan a CVA, clearer roles for directors and supervisors, more active discussion with HMRC as a major creditor, and the introduction of standard terms.

Commenting on the research, former president of R3 and partner of CVR Global LLP, Adrian Hyde said: ‘The CVA system works well, but changes could see the procedure used more than alternatives, return more money to creditors, rescue more businesses, and improve confidence in the process and wider insolvency framework. Importantly, CVAs give creditors a direct say in the insolvency process and are much more transparent than procedures like a “pre-pack” administration which can be used in similar circumstances.

‘The research makes a strong case for the government to back reforms which could improve the effectiveness and reputation of CVAs. Government plans for a moratorium, which have been stalled since 2016, should be revived, for example.

‘This would help in all insolvency cases, not just CVAs. There is also scope for the insolvency profession to make it clearer what the IP’s role should be in a CVA and to improve the information provided to stakeholders.’

To improve the perception and performance of CVAs, the report recommends:

CVAs should be capped at three years – CVAs typically last five years, but, the research shows, long CVAs increase pressure on the struggling company, increase the risk of failure, and do not guarantee better creditor returns.

A pre-insolvency moratorium should be introduced – Companies which used an existing, limited pre-CVA moratorium from creditor enforcement action, or which used the moratorium provided by administration, tended to have a higher chance of completing their CVA. The pre-CVA moratorium should be expanded to all sizes of companies, simplified and should be available for use ahead of any insolvency procedure. The moratorium would give companies more time to plan a CVA free from creditor pressure.

Directors’ and insolvency practitioners’ (IPs) duties should be more clearly defined – directors should be required to address financial distress at an earlier stage than now, while the IP’s role in a CVA should be clarified and reporting enhanced. Consideration could be given to extending the existing system of insolvency fee estimates to CVAs.

Public sector creditors should have to explain why they will not support a CVA – HMRC was the most likely creditor to oppose a CVA but that it provided little feedback on its reasons for doing so.

Standard CVA terms and conditions should be introduced – Standard terms would improve the consistency of CVAs, reduce costs, and help build knowledge among stakeholders about how the process works.

The main reasons for a CVA collapsing was failure of the company to make the required contributions, pay post-CVA creditors, and settle unpaid tax bills with HMRC, as well as difficulty in trading when in a CVA. The report notes that some companies have lost contracts simply because they have been in a CVA.

Professor Peter Walton, who carried out the research, said: ‘Whenever dealing with companies in financial distress, law and practice must strive to get the balance right between the rights of creditors on the one hand and the interests of other stakeholders on the other in order to ensure feasible businesses survive in circumstances that are transparent and fair.

‘Not all companies in distress can or should be saved, but where they can be turned around, it is important to make turnaround processes as efficient and timely as is reasonable. Our report highlights a number of ways in which we believe CVAs can be made to work more effectively for the benefit of all stakeholders.’

By Sara White

Company voluntary arrangements: evaluating success and failure, reseearch report produced by the University of Wolverhampton and Aston University, issued 30 May 2018

 

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