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What happens if CVA contributions are no longer affordable?

What is a Company Voluntary Arrangement (CVA)?

Company Voluntary Arrangements (CVAs) can be a valuable business recovery tool to avoid an insolvency process such as administration or liquidation and ensure the turnaround and future success of the company.  A CVA is a form of binding contract between the company and its creditors, changing the terms of payment. But if a CVA is agreed by creditors, but the company can no longer adhere to the terms, what happens?

The starting point is to make the CVA terms realistic

Before a CVA proposal is put forward to the creditors, we work with the directors of the company to ensure that what is being put forward is reasonable.  It must give the creditors enough that they will be willing to support the CVA and wait up to 5 years to get the payments.  It must also be workable for the company.  This balance can sometimes be hard to reach, but with the years of experience we have in putting together such proposals we can help to ensure that the right balance is found.

What happens though if things don’t go to plan – a case study 

We helped the directors of a book publishing company to put forward a CVA to its creditors.  CVAAn initial review of the company’s financial information showed that if the company were to be wound up in liquidation the creditors would receive nothing.  In this case the company had limited realisable assets and there was a significant debt due to the bank.  With the bank having a charge over the assets of the company any sale proceeds would have gone to it, leaving the creditors with a ZERO return and 100% debt write off.

After making some changes to the business model, the proposal put forward was that the company would use its surplus profits each month to make contributions to the creditors and top this up annually if significant profits were made.  The term of the CVA was five years with creditors predicted to receive 50% of their debt back.  Importantly the CVA would see the company continue to trade, safeguarding jobs.  The creditors could also continue to supply to the company, so as well as receiving a dividend they would also receive ongoing orders from the company.

For the first two years the CVA went as planned.  Although no surplus significant profits were made, the company was on time in making its monthly contributions and a first dividend of 10% was paid to creditors after two years.  The CVA was drafted such that the contribution payments would increase each year in line with an increase in projected profits.  After two years the increase in turnover had not been reached and the company could not afford to meet the increased payments.  When the first increased payment was missed we spoke with the directors at an early stage to find out why.

The company had been unable to increase the turnover to the levels anticipated, as such the increased payments were not possible, but the company could continue to make the current level of payments already being made.  As a result of us dealing with the issue at an early stage, the company was not in default and it was therefore in a good position to propose a variation of the CVA terms to the creditors.

The variation put forward would reduce the total dividend to 40%, but allow the company to continue to trade.  We put this forward to the creditors together with an explanation from the directors to explain why things had not gone to plan and as a result creditors approved the variation to the agreement.

The CVA continued and further dividends were paid to creditors.  The company though found that it could not invest the required amount in equipment to continue to be competitive and allow the CVA to continue.  We had a further discussion to establish what should be done.

It was clear that the investment in new equipment was needed, but if it were made, the CVA payments could not be maintained.  What was clear was that the payment of 40% was no longer achievable and the company would need at least one year of significantly reduced payments.  A further variation was therefore put forward, this would increase the term of the CVA by one year and reduce the overall dividend to 30%.

The creditors were comfortable with this compromise and agreed to the second variation.  The directors worked hard to ensure all future payments were made on time and by the end of the term the creditors received 30% of their debt.  Although the amount was not as much as anticipated, the creditors have continued to work with the company and have benefited from significant trading both during and after the CVA, which would not have been the case if the company had simply ceased to trade.

In this case, good communication between the directors, the creditors and us ensured that early communication of issues was possible and therefore allowed a resolution to be found.  By dealing with issues before they reached a default stage we successfully put forward two variations.  The company now continues to trade successfully with the CVA now in the past.

Nicola Layland By Google+ |
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