When the Insolvency Act 1986 was written, pride of place, Part 1 of the Act, was dedicated to the Company Voluntary Arrangement (CVA). Not hidden in Chapter 17, sub-section A (iii) paragraph 22(z) but there, on the first page, heralding a new era of corporate recovery and rehabilitation.
Thirty-two years later we record a total of 13,669 CVAs, an average of 427 a year, with no year recording as many as 1,000 cases. Having said that, 2018 saw a very high profile CVA with Homebase coming to an agreement with landlords and creditors to continue trading.
Putting this in perspective: That’s 11.7% of all “Rescues” under the Insolvency Act and only 2.3% of all Insolvency cases. Not the spectacular and revolutionary change to regulation that the prominence in the legislation had hoped for.
The CVA leaves directors in control
On the face of it, the CVA, provided it is approved by at least 75% of creditors voting by value and by the shareholders, gives directors an opportunity to resolve temporary difficulties whilst retaining control of the company. Much like Chapter 11 of the US Bankruptcy Code (see the previous blog in this series) it gives the directors the opportunity to make necessary changes to the company, devise a plan for recovery and then implement that plan.
OK, so the CVA is “supervised” by an Insolvency Practitioner (IP) and initially designed under the guidance of an IP (normally the same IP) rather than the company being controlled by the IP as in the case of Administration or Liquidation but why have so few companies in the UK taken up this option?
So, what do we know?
Let’s look at the wealth of research undertaken in this important area of government policy…
What? There’s not much to find?
There are, however, a couple of well researched reviews in 2003 (Cook et al.) and 2011 (Walters and Frisby). The reviews provided evidence to conclude the following:
From Cook et al (2003):
- There was no evidence that CVA, as a rescue tool, has encouraged earlier action by managers. A heartfelt plea from creditors, IPs and bankers and policy makers over many years has been that directors should give early warning of problems. In an ideal world that will happen, but in our real world it does not. The CVA mechanism gives no benefit or advantage to directors to alert lenders to financial problems. Directors have little or nothing to lose by carrying on until a creditor calls a halt.
- Most CVAs end in failure or are used to wind up the company. Well, if directors (and their advisors) leave things too late then the options are limited.
- Post CVA creditors are reluctant to give credit. Really? Why wouldn’t creditors lend to the company that has just lost them lots of money in the hope that this time, the credit will be repaid?
- “Tarnished” managers have problems in managing the business in a CVA. And here’s the big cultural challenge – entrepreneurs take risks and sometimes they lose. Who will fund a serial entrepreneur with a patchy record and the stigma of “failure”?
Do CVAs deliver?
And from Walters and Frisby (2011):
- CVAs are effective in delivering superior returns (where the arrangement is not terminated early). Yep, let the whole thing run its course and creditors will be better off. They will have lost their hair and fingernails by then, but that 10p in the £ dividend may well be more secure.
- CVAs can realise maximum value for creditors even where the company ceases to exist at the end (asset sale and liquidation). So, CVAs are good at allowing better asset values to be negotiated – no longer a “fire sale” but the sale of an operating asset.
Inevitably, all researchers conclude that more research is needed. Any takers?
Cook, G; Pandit, N; Milman, D; and Mason, C, (2003), Small firm rescue: a multi-method empirical study of Company Voluntary Arrangements, Centre for Business Performance (ICAE&W), , 1-84152-157-4.
Walters, A and Frisby, S, (2011), Preliminary Report to the UK Insolvency Service into Outcomes in Company Voluntary Arrangements, Available at: http://dx.doi.org/10.2139/ssrn.1792402