Paper boat changing direction

Restructuring Your Business - CVA as an Option


For many businesses coming out of lockdown it is obvious that changes will be required to adapt to the ‘new normal’. You may have carried out an options review and now need to downsize operations for your core business to survive. Cash flow may have dramatically reduced and the only way you can deal with the historic creditors is by using a formal insolvency process to compromise the debts so that they are more manageable.

There are a number of ways in which you can do that, but a Company Voluntary Arrangement (“CVA”) is definitely a popular option for many. However, with the change in status being granted to HM Revenue & Customs from 1 December 2020, will it continue to be used?

How does the CVA work?

A CVA is an agreement with your company's unsecured creditors. It allows a company to continue to trade and repay a proportion of its debts, in full and final settlement of its liabilities.  If 75% of the creditors, by value, vote in favour of the proposal then it is legally binding on all.

Often, a CVA is used to help businesses downsize where there are multiple premises, such as in retail and casual dining, as it provides an opportunity to restructure the operations as well as manage creditor pressure, without the business ceasing to trade.

The company works alongside the restructuring team to understand the business and identify the areas of concern, before taking steps to implement a restructure. Detailed cash flow projections are produced which helps to identify the areas of the business which are underperforming; for example, there may be departments or premises which are loss-making due to the ongoing costs or there may be divisions which are no longer a strategic part of the business. Any ongoing rental costs can also be renegotiated to make the business viable.

What are the advantages for the company?

The main advantage is that the directors continue to run their company. Once a CVA has been agreed all legal action is stayed, which means that visits from bailiffs and winding up petitions cannot be instigated. There is no requirement for businesses to tell customers about their Company Voluntary Arrangement. It does not have to be disclosed on company correspondence, and is essentially a private matter between the company and its creditors. This is a huge advantage when one is trying to preserve the company’s reputation.

What are the advantages for creditors?

There is transparency in that all the company’s projections and detailed plans are put to creditors before they vote on the restructuring plan. There is peace of mind that the insolvency practitioner, now the Supervisor, will monitor progress and end the CVA if the company does not keep to its proposals. Hopefully, at the end of the day creditors will achieve a better return then if the company was placed in administration or a creditors’ voluntary liquidation.

What are the advantages for employees?

By ensuring the ongoing viability of the business jobs will be saved and employees will continue to get paid. Unfortunately there may be some redundancies arising from the restructure. However these costs will be paid in the first instance by the Government, who effectively stand in the shoes of the employee as a creditor.

A note of caution

CVAs alone cannot fix a struggling business; rather they provide an opportunity for it to take stock, rethink its strategy and reposition its operations, giving it a better chance of survival longer-term.

For a CVA to succeed the business needs a few things. Often extra capital is needed to fund the operational changes that are necessary to return the business to profit however we can assist with that if needed.

But perhaps the most important is management’s desire to keep the business alive. The CVA is a useful tool but it can be a challenge to implement where the business is restructuring its operations. Under the guidance of an experienced insolvency practitioner, there will be some difficult conversations and management should be ready for that challenge before taking the plunge.

How will HMRC’s change of status impact upon the CVA?

The Government’s most recent Finance Act to gain Royal Assent included a change in status of HM Revenue & Customs (“HMRC”) which means that any outstanding VAT and PAYE, together with any employees’ National Insurance Contributions will now rank as a preferential creditor above trade creditors. It is noted, however, that they rank behind employees’ preferential liabilities. Preferential creditors have to be repaid in full before unsecured creditors can receive a distribution.

The Government has stated that it believes that this position will not adversely impact the rescue culture. However, if a business has significant debts due to HMRC (and most distressed businesses do) then its ability to repay those in full will likely impact on the chances of successfully saving the business.

The changes to HMRC’s status come into effect on 1 December 2020, so if you are thinking about using the CVA as a vehicle to restructure your business, it may be worthwhile thinking about your options now.

Please get in touch if you think your business may benefit from restructuring.

Contact Mike