How the reputation of the CVA is receiving a makeover

14 Jun 2018 | 5 min read

Rose Lagram-Taylor, barrister at South Square, says that if the recommendations in a report by R3, trade association for the UK’s insolvency, restructuring, advisory, and turnaround professionals, are adopted, the company voluntary arrangements (CVA) insolvency procedure could become more attractive.

What are the current issues with CVAs that have been identified by the R3 report?

CVAs have dominated the news recently, with well-known high street brands using the procedure to restructure their debt. However, there has been growing concern that the procedure is being abused, with companies avoiding administration to the detriment of their creditors. Further, there has been a relatively high rate of failure, with 65% of the 552 CVAs commenced in 2013 being terminated without achieving their intended aims (although the report highlights that accessing the success or failure of CVAs is not straightforward).

The purpose of R3’s report was therefore to consider how effective or otherwise CVAs are in practice, and to investigate the outcomes where CVAs fail. In doing so, five main issues were identified:

  • there are situations where CVAs have been implemented but terminated quickly
  • some CVAs return very little to creditors over their lifetime
  • the true length of CVAs is often much shorter than its expected duration due to missed contribution payments
  • there is often a significant gap between the expected level of dividends and the actual dividends
  • there is not always a contingency plan for the costs of a subsequent winding up in the event the CVA terminates

What recommendations does the report make?

The report made eight main recommendations:

  • CVAs should last no longer than three years without good reason
  • directors’ duties should be articulated more clearly and fully to include a requirement to address financial distress earlier
  • the roles and duties of nominees and supervisors should be articulated more clearly and fully in a revised statement of insolvency practice
  • public sector creditors should have to explain their decision fully if they refuse to support a CVA proposal
  • a new form of pre-insolvency moratorium should be introduced
  • standard terms and conditions, at least for small company CVAs, should be made available and adopted, and certain classes of creditors should have to explain fully if they refuse to support the CVA
  • consideration should be made for whether the insolvency practitioner fee system used in other insolvency procedures should be adopted in CVAs
  • documentation filed at Companies House in relation to CVAs should be more informative to improve transparency and encourage confidence

How do you think the different creditor groups will react to the report?

Overall, it seems likely that different creditor groups will react positively to the report. Although CVAs tend to have a mixed reputation in practice, this report serves as a reminder that the alternative option, usually a winding up, is probably worse from the point of view of creditors. If the circumstances are right, and the CVA is executed properly, it can provide a good outcome. As this report goes someway to assisting with the proper execution of a CVA should its recommendations be implemented, creditors will be reassured that their interests are being considered and balanced with those of the company.

Landlords, in particular, should be pleased that their views have been taken on board. For example, their concern that a company’s management often fails to change its conduct in light of financial distress is addressed by the recommendation with regards to directors’ duties and the requirement to address financial distress earlier.

Further, their view that the length of time of a CVA is simply too long is clearly addressed by the recommendation that a CVA should generally not last any longer than three years. No more should it be that a CVA simply represents ‘a slow death by a thousand cuts’.

How likely are the recommendations to be implemented?

It is difficult to predict whether the recommendations will be implemented. However, the research makes a strong case for the government to back reforms which could drastically improve the effectiveness and reputation of a CVA. It is certainly hoped that the recommendations do become practice.

Anything else worth mentioning?

An important point highlighted by the report is that the early termination of a CVA is not necessarily indicative of the CVA having failed. However, the report points to the fact that while the CVA may not have achieved the purpose set out in the proposal approved by creditors, unsecured creditors nevertheless regularly receive dividends from the CVA contributions, which is often in excess of what might generally be expected in the likely alternative procedures of a pre-packaged administration or insolvent winding up.

Overall, and perhaps unsurprisingly, there are no clear patterns as to what factors lead to a successfully terminated CVA. A particular evidential problem is that there is no information on Companies House as to what may have happened without the CVA in the alternative of liquidation. As many CVA proposals predict a nil return to unsecured creditors in liquidation, any dividend would clearly be a better and more successful result.

 

Further Reading

If you are a LexisPSL subscriber, click the links below for further information:

CVAs—landlord issues and remedies

The CVA proposal and procedure—the position under the Insolvency (England and Wales) Rules 2016

Not a subscriber? Find out more about how LexisPSL can help you and click here for a free trial of LexisPSL Restructuring and Insolvency.

Interviewed by Stephanie Boyer.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

 

 

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