BRI Business Recovery and Insolvency bucking the Company Voluntary Arrangements (“CVAs”) trend?
Seeing the words ‘successfully completed’; ‘100p in the £’; and ‘CVA’ all together in the same heading is incredibly rare. Why?
- The number of CVA’s implemented annually remain approximately half of those that were recorded prior to the pandemic.
- A review previously carried out by one of the insolvency regulators identified that about 2/3 of CVA’s were unsuccessful and ended in termination.
- HM Revenue & Customs changed their creditor status back to preferential on 1 December 2020. With them now having priority status over other creditors, this often reduces the prospect of producing a proposal with an acceptable return to the unsecured creditors.
At BRI Business Recovery and Insolvency we are well versed in implementing successful CVAs for clients. This case study is one of many CVA’s that we have successfully completed.
How does a CVA provide a “relief valve” to companies drowning in historic debts?
A CVA is a legally binding agreement between the company and its creditors that outlines how debts of a company will be settled, either in full or in part, over a period of time. The legislation is light on specifics – the terms of the Arrangement can be drafted, and modified by creditors, in any way subject to the company agreeing to it and 75% of creditors agreeing too (with a safeguard against associated creditors pushing through something that non-associated creditors do not want).
A CVA mechanism is an effective tool to plug financial leaks, whilst allowing the directors and shareholders to restructure a viable business.
How can a CVA help a business?
A long established plumbing merchant that operated from multiple locations experienced significant financial difficulties due to declining sales, high operational costs, and the impact of external economic pressures. As consumer-shopping habits shifted and purchasing costs spiralled, the company struggled to maintain profitability. Despite the company being balance sheet solvent, due to owning numerous properties, the trading business was burdened with substantial debt, facing creditor demands, and at risk of insolvency.
The primary challenge was to provide the company with some breathing space to allow the business to dispose of the high levels of stock held and avoid being forced to sell the various properties owned at a substantially lower value. The company’s management recognised how a CVA would produce a positive outcome for all stakeholders in comparison to appointing administrators to take control of the company.
The CVA proposal to creditors
The CVA proposal, developed with the help of BRI Business Recovery and Insolvency, focused on maximising the company’s asset value whilst offering a repayment plan of 100p in the £ of all preferential and unsecured creditors in a reasonable time frame. HMRC did seek to make some minor modifications to the original proposal, however BRI Business Recovery and Insolvency were able to demonstrate how the CVA would offer a better outcome than any other alternative insolvency process and all creditors that participated at the meeting of creditors voted in favour of the terms of the arrangement that were put forward.
Will HMRC accept a CVA?
Yes, HMRC will look to support proposals that provide an optimal outcome to creditors, but the proposal needs to provide an appropriate level of detail and be supported by accurate financial information. Please see our previous article about HMRC engagement in CVAs.
Positive outcome achieved
The CVA process proved successful for the Plumbers Merchant and those bound by the terms of the arrangement. Within just 2 years sufficient assets, with a value in excess of £1.25m, were realised that resulted in all proven preferential and unsecured creditors’ claims being settled in full.
If this was a checkatrade review, it would certainly justify a score of 10 out of 10. This successful restructuring of debt serves as a positive example of how seeking assistance from BRI Business Recovery and Insolvency will allow you to obtain a well-structured CVA that can provide a viable solution for companies facing financial distress, whilst preserving the company for the benefit of the company’s shareholders. The CVA mechanism takes time to implement, so the earlier advice is sought the more likely it is that a successful rescue will be achieved.