The Initial Assessment
When considering whether a CVA is the most suitable option for a company in financial distress, the directors’ will firstly need to contact a licensed Insolvency Practitioner (“IP”). The IP will then arrange a meeting at which the best course of action for the company can be determined.
At The Business Debt Advisor we will gather as much information about the company as possible. It is important to understand the structure of the company, trading history, and any events which have led to present difficulties. It is also vital to obtain information as to the company’s assets and liabilities, and prepare projections for the short (and long) term.
This might seem like a big task, but we will take on as much of this work as possible.
Drafting the CVA Proposals
Once it is established that a CVA is viable, and is likely to be viewed favourably by the creditors’, the company will appoint an IP to prepare the proposals which will explain how the company got into difficulty and what is likely to change. The proposals also include details about the company’s assets and how they are to be dealt with. It is usual to exclude assets that are essential for future trading such as book debts, plant and equipment, etc
The proposals need to demonstrate to creditors that they will get a better return than through other forms of insolvency.
The draft proposal will then be reviewed by the directors’ and revisions made, if necessary. At this stage the IP and the directors’ should be confident that the company will be able to adhere to the terms of the CVA and if a final draft cannot be agreed, then the IP may recommend that the company enters into administration
, or liquidation
as an alternative.
The Nominee’s Report
The Nominee will produce a report on the proposals and offer an opinion as to whether the proposal has a reasonable chance of being approved, and implemented, and whether it should be put forward to the company’s creditors’ for their consideration.
To enable the Nominee to prepare this report the Directors will provide the Nominee with a final draft of the proposal, a statement as to the company’s assets and liabilities, and any other information that might be required.
Once this has been delivered to the Nominee, the Nominee will have 28 days in which to submit a report to the court, and confirm the date and time on which the necessary meetings of creditors’ and members’ should be held to consider the proposal.
In cases where the company requires the protection of a moratorium, the process will differ slightly and further information can be found here
Approval of Proposal by Creditors’ and Shareholders’
Creditors’ and shareholders’ must consider the proposals and will then vote either to support, modify or reject the proposals. If the proposals have been properly thought out and are supported with viable projections, creditors are likely to favourably consider them.
The Creditors’ Decision Procedure
The Nominee will seek a decision from the company’s creditors as to whether they approve the CVA proposal. The company’s proposals will be approved if 75% or more (by value of debt) of its creditors, who are entitled to vote, agree to support the arrangement.
If modifications to the proposal are requested then the same majority of creditors’ must agree the proposed change. This is the part of the process that directors’ may be most concerned about, but if care is taken when drafting proposals, then there is not usually a problem in obtaining approval in most cases.
The Meeting of Shareholders’
A physical meeting of the company’s shareholders’ is held immediately following the date and time of the creditors’ decision procedure. Assuming that the proposals are approved by the required majority of creditors’, the shareholders’ must then decide whether or not they can agree to the proposals, and any modifications that the creditors’ may have suggested. The company’s proposals will be approved if at least 50% of shareholders vote to support the CVA.
Notification of Approval of the CVA
Where the requisite majority of creditors’ and shareholders’ approve the proposal, the Supervisor will issue a report on the outcome.
This report will be circulated to all creditors’, members’ and the Court within 4 days. It will provide an overview of what was decided, and the votes received. The Supervisor will also circulate additional information to the creditors’ and liaise with them as to the value of their claims.
Effect of the CVA
The CVA takes effect from the date of the creditors’ decision. No action can then be taken against the company by its existing unsecured creditors’ unless the terms of the CVA are not adhered to.
The company will be expected to make the agreed contributions as set out within the proposal. These contributions must be paid to the Supervisor and will be held in a designated trust account. As long as the company continues to adhere to the terms of the arrangement, unsecured creditors bound by the CVA, cannot pursue the company any further for the recovery of their debt.
The directors will benefit from this peace of mind and should concentrate on the task of ensuring that the company can trade profitably going forward.
It is important to note that if contributions are not maintained, or the company breaches any other obligation, then the likely result will be that the CVA will terminate, and the outcome for the company may be that a petition for liquidation is presented against it.
Careful consideration must be given to all options available to a financially distressed business. For more advice, fill out our contact form
and we will be in touch.