Save content
Have you found this content useful? Use the button above to save it to your profile.
AIA

Insolvencies down as businesses turn to CVAs

by
9th Aug 2010
Save content
Have you found this content useful? Use the button above to save it to your profile.

Figures published by the Insolvency Service show an overall decrease in the number of insolvencies this quarter, with firms turning instead to other methods such as CVAs to settle their debts.

Corporate insolvencies were down 19.1% in the second quarter of this year compared to the same period last year. There were 4,080 company liquidations in total, a 0.5% increase since the start of the year.

Compulsory liquidations reduced by 21% on the previous year, with 1,169 companies taking this route. The number of businesses entering into creditors’ voluntary liquidations (also known as company voluntary arrangements, or CVAs) went up by 5.4% on the previous quarter, with 2,911 companies choosing this method.

Restructuring experts predict the downward trend for insolvencies will continue, as more businesses opt for CVAs and other arrangements.

“The number of administration appointments overall will continue to go down, carrying on the trend from Q1 2010. Whilst we have seen a hardening of attitudes by HM Revenue & Customs and other stakeholders, it seems that the luxury of time is still being afforded to the majority of financially impaired SMEs. Liquidations are also likely to continue to decline in numbers for the same reason. Company Voluntary Arrangements (CVAs), however, are likely to enjoy a further increase in popularity following widespread adoption in a number of retail matters,” predicted Geoff Carton-Kelly, restructuring and recovery partner at Baker Tilly.

“CVAs are up on the first quarter, indicating that companies are reaching agreements with their creditors to pay them over time, rather than going bust. This shows that everybody is prepared to muck in during these difficult economic times,” said John Alexander of tax and financial planning consultancy CBW.

Firms considering entering into a CVA should bear in mind that it’s not a catch-all solution. “A CVA is not the right solution for every insolvent business,” warned Simon Rowe, partner at Milsted Langdon. “Only those that are essentially profitable should consider it as a means of financial rescue. That said, for many directors who recognise insolvency at an early enough stage and are willing to work to turn the company around, a CVA can be an effective and flexible tool for dealing with historic financial difficulties”.

To help firms get to grips with CVAs as an option, Milsted Langdon has issued the following information.

What is a CVA?
At its most basic level, a CVA is no more than a contract with creditors where they agree terms by which they are repaid in full or in part over a period of time.

The directors, working with an insolvency practitioner, will put forward a proposed agreement, along with supporting information setting out what the company intends to do.

The insolvency practitioner will also submit a report to the court confirming that the offer the company has put forward is fair and has a reasonable prospect of successful implementation, and should therefore be considered by creditors.

These two documents are sent to creditors for their consideration. Creditors then have three options. They can vote in favour of the proposal, vote against it or vote in favour of it but subject to some form of modification to what has been proposed.

Provided more than 75% (by the value of their debts) of those creditors who vote do so in favour of the proposals, they will be approved and the CVA is then binding on all creditors irrespective of how they voted.

The 75% voting limit is a key advantage to the CVA as in most cases this effectively means that the agreement can be approved by only a handful (in number) of a company’s creditors.

Once it is approved, all that is required of the company is that it does whatever it offered to do under the proposals. It continues to trade under the control of its directors and none of the creditors are able to take legal action to recover their debts.

What should the company offer?
Firstly, it is important to appreciate that there is no need for a company to offer creditors payment in full. Secondly, whilst many CVAs are based on fixed monthly contributions, this is not a requirement.

The company must take care not to offer more than it can afford. Equally it needs to ensure that it offers enough to win sufficient support from creditors for the proposals.

A CVA should never be used to prolong the inevitable demise of an unsound business. Instead it is a mechanism by which profitable businesses with arrears of debt can be rescued and the return to creditors maximised.

Unlike pre-pack administrations, a CVA seldom requires directors to invest new money into a business and allows directors to retain day-to-day managerial control. The role of the insolvency practitioner is limited to ensuring the company complies with the proposals.

For many companies, having to pay a fixed sum each month can put a great deal of financial pressure on an already cash-constrained business. We have therefore helped companies to put forward offers that are tailored to their specific financial circumstances.

Such bespoke offerings can provide for contributions into a CVA to be adjusted to reflect seasonality of a business (with more paid in the busier months of the year and less at the quieter times) or its anticipated growth (with more paid in later years than sooner ones). Contributions to the CVA fund can be calculated as a percentage of profit or even turnover. Alternatively they can represent the realisation of non-core assets.

This flexible approach minimises the chance of the company being unable to honour its obligations under the terms of its proposals and the consequence which would be the failure of the CVA.

What about HMRC?
HMRC views CVAs completely differently from time-to-pay agreements. Before supporting a CVA, it will still want to ensure that the underlying business is sound and that it has a reasonable prospect of meeting ongoing tax liabilities. However, it will not require payment in full and typically companies pay between 40% and 100% of their debts over a period of five to seven years.

Often companies that have been declined a time-to-pay agreement by HMRC or which are in default of an existing agreement may still be able to obtain HMRC’s approval for a CVA.

That is not to say that HMRC will approve any offer but we have worked with its specialist voluntary arrangement unit for many years and have an almost unbroken record of obtaining its approval.

 

Tags:

Replies (1)

Please login or register to join the discussion.

avatar
By Stephen Powell
09th Aug 2010 17:59

A Company Voluntary Arrangement (CVA) is an insolvency procedure

I have read the article with interest.  There is an overall decrease in corporate insolvencies, but this is not due to the increase in CVAs.  A CVA is in fact also a formal insolvency procedure.

The first part of the article advises (in para 3) that creditors voluntary liquidations are also known as company voluntary arrangements.  They are not.  They are two entirely different corporate insolvency procedures.   What the Insolvency Services figures actually state is that company liquidations (comprising both compulsory liquidations and voluntary liquidations) decreased 19.1% in Q2 of 2010 compared to Q2 of 2009.  Receiverships are down 12.5%, Administrations down 24.3% and Company Voluntary Arrangements (CVAs) are up a significant 47.8%, although in raw numbers there were 232 CVAs in Q2 of 2010, whereas there were over four thousand liquidations in the same period. 

One of the main reasons for the overall reduction in corporate insolvencies is the "time to pay" arrangements that have been afforded to companies that are in arrears, evidenced by the reduction of compulsory liquidations, where HMRC would previously have petitioned earlier.   The time to pay arrangements will not last forever.  I expect there will be a rise in corporate insolvencies as these expire later this year and are not renewed as the Treasury goes in search of the funds HMRC are owed.

Stephen Powell, Insolvency Practitioner, HJS Recovery.

 

 

 

 

Thanks (0)