How to negotiate a CVA

Company voluntary agreements (CVAs) are becoming increasingly common in insolvency cases, writes Jamie Constable, a partner at Robert James Partnership.

When a company goes into administration, there are really three options available – the business is sold as soon as administrators are appointed to a prearranged buyer (sometimes known as a pre-pack), the assets are sold by the insolvency practitioners if no buyer is found, or a legally binding CVA is reached between the company and its creditors.

The first two cases result in the cessation of the old business, are far more disruptive and will usually result in much lower levels of return for creditors than with a CVA, in which the business and any contracts it has remain intact. For smaller creditors in particular, the opportunity to recoup as much of the outstanding payment as possible is greatest with a CVA and in some cases, it can be as much as the full amount, albeit deferred over a fixed period of say three years.

In order to secure a formal CVA, 75 per cent of creditors must agree to the terms of the CVA, which will normally follow intense negotiations between stakeholders over monies due. In practice, it is relatively common for a more informal company restructuring to occur before this stage whereby a group of creditors would collectively agree to CVA-type payment terms to protect their interests and prevent their customer becoming officially insolvent.

Figures from KPMG show that the number of CVAs in the wholesale and retail sectors increased from 75 to 100 this year, while the construction industry saw the agreements rise to 147 from last year’s 124 during the same period. Certain sectors have always been more predisposed to CVA arrangements because their business trades from costly leased premises and long-term agreements are in place with landlords. Retailers, restaurants or health clubs fall into this category for instance and the most recent high profile cases in which CVAs were used successfully as turnaround vehicles can be seen with Miss Sixty, JD Sports and Discover Leisure.

Greater use of CVAs across different sectors is an interesting development to observe since they are notoriously difficult to agree. This is because such a high level of consensus between creditors and the business management is needed. However as the number of insolvencies has risen in recent years due to the economic climate, companies have begun to understand that this route represents the best option to limit losses and recoup at least some of the monies owed.

Obviously it is never a good situation to be in, but when a customer is facing financial difficulties, a compromise agreement such as this could be best all round. In practice it is very similar to HMRC’s own Time to Pay scheme which so many businesses have taken advantage of.

If as a business owner you are facing a situation such as this, where either you are having severe difficulties with cashflow or you have creditors potentially facing insolvency you should take advice on your best options and don’t dismiss the CVA. From our experience, if the customer does end up in administration, once insolvency practitioners are appointed, your overall returns will be lower than if you are able to reach a compromise deal with the business owner directly. It may also be possible for you or the firm to receive rescue funding through a turnaround specialist, during which time the business could also remain intact and continue trading.

Jamie Constable is a partner at Robert James Partnership and runs turnaround investment company RCapital, which has provided rescue funding and turnaround management to businesses including Little Chef, Helena Leisure and Morses Club.

Should you steer clear of liquidation through a CVA?

For beleaguered retailer JJB Sports, coming to a company voluntary arrangement (CVA) ensured it could continue to trade. With insolvency figures hitting 4,941 last quarter (up 56 per cent on the same period last year), CVAs could be the answer to some companies’ woes.

CVAs offer a repayment proposal to creditors as an alternative to liquidation, when a company can no longer pay back its debts. The agreement gives the company breathing space while it addresses the issues that have caused its financial difficulties. Either the full amount of what is owed, or a proportion of it, is ‘ring-fenced’, to be paid back within an agreed time frame, while the remainder (if any) continues to be repaid under the normal terms.

Joanne Wright, a partner at recovery firm Begbies Traynor, warns: ‘CVAs work only if the company is inherently profitable and it can point to a single reason that has caused the problem when it comes to paying back creditors.’

CVAs and the art of negotiation

For a CVA to be put in place, 75 per cent of creditors (by value) will need to vote in favour of the proposal. Tom MacLennan, chief executive of Tenon Recovery, says that securing such approval is not always easy.

‘It tends to be a combination of negotiation and poker. Directors will put forward a proposal and then the creditors negotiate a better one, either by increasing dividends or tightening payment terms,’ says MacLennan.

In order to win creditors round, the company will need to produce a viable proposition, historical accounts, forecasts for cash flow, profit and loss and a good explanation about what’s gone wrong. Once agreed, the terms can later be changed – as long as 50 per cent of creditors agree.

Companies will also be required to make structural changes, involving major cost-cutting drives – such as salary reductions and redundancies.

MacLennan adds that in the current environment, creditors are becoming more amenable to proposals. ‘There is more willingness now than in the last ten years, as creditors previously thought they could easily find another company to replace the loss in turnover,’ he says.

However, Ian Boden-Smyth, a spokesperson from the Insolvency Helpline, warns that CVAs tend to have a low success rate. ‘There’s often an expectation gap, with creditors not fully understanding what CVAs are. They are not a magic wand, they’re only going to work if the company in question has a full order book of at least one to two years. Long-term contracts are the best route out.’

Boden-Smyth also advises that companies do their groundwork before forking out on an insolvency practitioner: ‘Meet every creditor beforehand and tell them what’s going on, and find out whether they are on your side. As a creditor, there’s nothing worse than receiving a letter out of the blue that has the word “insolvency” on it.’

Nick Britton

Nick Britton

Nick was the Managing Editor for when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...