Case Study: Compromise Agreements and CVA Offers Lifeline for Business
Background
The Company was significantly geared with indebtedness of over £4m between three banks, with all three having security over the Company’s assets. There was an inter-creditor agreement between the banks resulting in one of the lenders having priority over the others.
The senior secured lender had concerns regarding the Company’s viability and had moved the Company into its special situations unit and had instructed an insolvency practitioner with a view to them taking steps to place the Company into Administration.
The Company was referred to Armstrong Watson by its auditors, and the directors were keen to understand what options were available to them so that they could ascertain whether there was an alternative to an Administration appointment.
Stage 1 - Options review and assessment of feasibility of compromise with secured lenders
We discussed the Company’s current position with the director and independent finance consultant to understand the business and identified that it might be possible to reach compromise agreements with each of the secured lenders whilst undertaking a Company Voluntary Arrangement (“CVA”).
Our work involved working closely with the independent finance consultant to understand what settlements could be available for each of the secured creditors within a CVA.
We assisted the Company in the negotiations with each secured lender. This included producing reports to send to each which outlined the headline terms of the proposed CVA and compromise agreements illustrating the potential outcome for each lender against the alternative insolvency procedures of administration and liquidation.
With our support, the Company was able to secure compromise agreements with each secured lender and enabled them to approach the unsecured creditors with a CVA proposal.
Stage 2 – Implementation of the CVA
We were engaged by the Company to assist with making a CVA proposal to its creditors which included a different settlement to one specific creditor as well as including provisions for its secured creditors. The Company’s creditors included several suppliers from overseas.
We worked closely with the Company and legal advisors to prepare a CVA Proposal for a five year CVA which was circulated to creditors. Following the circulation of the CVA Proposal and prior to the decision date, we liaised with creditors and their representatives to address any concerns and queries. This included concerns which were raised by the Company’s secured lenders.
As part of this work, we worked with the Company to suggest certain modifications to put to creditors at the meeting. These modifications were also shared with the secured lender and we were able to obtain confirmation that they were content with the terms.
Outcome
The virtual creditors’ meeting approved the CVA with the suggested modifications. Following the commencement of the CVA, we are continuing to monitor the Company’s compliance with the terms and are working closely with the Company to implement it successfully to date.
