What if a Company Voluntary Arrangement (CVA) is rejected?
A Company Voluntary Arrangement (CVA) is suitable for companies who require a legally binding payment plan. When in place, it allows a company to repay its debts in an affordable manner helping secure its future. The arrangement requires approval from 75% of creditors by value, and if they don’t feel they would get an adequate return, they can vote it down. So, what if your CVA proposal is rejected?
More information on Company Voluntary Arrangements
Why would a CVA be rejected?
Although many CVAs are approved, creditors may want more of a return than what the CVA offers. They could dislike some of the CVA’s terms; they might have an issue with debt being written off, or be unconvinced that the company will adhere to the repayment plan; as they may have defaulted on informal repayment plans in the past. Failing to convince creditors the CVA is the best course of action would result in it being rejected.
Even if a large number of the creditors agree to the CVA, if the proposal doesn’t receive approval from 75% of creditors by value, it will be rejected.
Advantages and disadvantages of a CVA
What are my options if my CVA is rejected?
Although the rejection of a CVA proposal isn’t the desired outcome, it doesn’t automatically mean the company will cease to be. However, it does mean the company will have to pursue further insolvency options. If this happens, which route you take will ultimately depend on the outcome you desire, and what returns the best result to creditors.
Company recovery
CVAs aren’t always suitable for a company, and this could be for several reasons: Either the debt may be too severe for the CVA to be viable, or the business could benefit from more extensive restructuring. Whatever the situation, you can explore alternative arrangements to allow the company to recover.
Company administration
Administration is an option for companies with lots of assets that can be used to raise funds to enable a period of trade to either try and resolve the company’s issues or sell the business or assets. In an administration, a licensed insolvency practitioner (IP) will take control of the company, and your responsibilities as a director will cease.
More information on administration
Pre-pack administration
Pre-pack administration follows the same concept as company administration, but pre-packing the sale of assets signifies that you wish to repurchase your assets to restart the business as a new company. Doing this is legal, as long as the purchase is fair and transparent, and your offer represents the best outcome to creditors.
More on pre-pack administration
Company closure
Sometimes a company’s debt or pressure from its creditors can be so severe that continuing isn’t feasible. In which case, the company may be better off closing than trying to carry on trading.
Creditor’s Voluntary Liquidation (CVL)
Creditors Voluntary Liquidation (CVL) is for directors who don’t wish to take their company further and would rather wind it up and close it. An IP will realise and liquidate the assets, with the company debt put to bed with the subsequent dissolution. Employees will be made redundant during this procedure. Although directors are allowed to start a new company afterwards, there are limits on the use of trading styles. The liquidator is obliged to conduct a report on the conduct of the directors leading up to the liquidation.
More information on Creditors Voluntary Liquidation
Pre-pack liquidation
If your core business has the potential to be profitable without its burdensome debts, you can explore a pre-pack liquidation. Similar to a pre-pack administration, the assets are sold to a new company – ‘newco’ starts trading, and the old company is liquidated. Assets, premises and staff can be transferred to the new company, which can continue without the old company’s debts. Creditors may see more of a return than if the company went into compulsory liquidation.
More information on pre-pack liquidation
In summary
Although a CVA is a viable course of action for many companies looking to repay their liabilities at an affordable rate, it requires approval from creditors before it can go through. Creditors can reject a CVA if they don’t agree with the terms, aren’t convinced you’ll be able to complete the payments, or if a high enough percentage of creditors don’t approve it. Once a CVA’s rejected, the company should pursue other insolvency procedures to avoid a winding-up petition and compulsory liquidation. Avenues open to you depend on your circumstances; these could include restructuring through company administration, pre-pack administration or voluntarily winding-up through a CVL.
How we can help
If your company is insolvent and is considering a CVA, contact us as soon as possible. Our team can offer you advice on your current situation, and help you understand the CVA application process. If we feel a CVA would be appropriate for your company and provide the best return, we can put together a proposal for your creditors. If a CVA is rejected or has failed we can advise you which alternative insolvency procedures would be most beneficial.
Case Studies
JS Security
Kelly Burton • Other • Administration
All 42 jobs have been saved at a Cheltenham security firm after it was bought out of administration.
Joint administrators Kelly Burton and Lisa Hogg of insolvency and business turnaround specialist Wilson Field were appointed to JS Security on 10 February after HMRC threatened to wind-up the company because of accumulated tax arrears.
The company, which operated from Old Station Drive in Cheltenham, has now been bought out of administration by existing, and associated company, JS Facilities Group Limited of Cheltenham, saving all 42 jobs.
The business will be operated by the existing management team lead by managing director John Search. The total value of the deal is undisclosed but it includes the business and the assets of the Cheltenham based company.
Kelly Burton, director and insolvency practitioner at Wilson Field, which has bases in Leeds and Sheffield, said;
“Unfortunately, the security services sector is very competitive which leads to hourly rate discounting and small margins.
“JS Security accumulated tax arrears which threatened its existence. After discussing the situation with the director, I am pleased that we have found a solution which will see the business continue to trade and also all 42 employees’ jobs transferred to the new company.”
JS Security was appointed the official security provider at Gloucester Rugby in June 2013 for two-years and also won the contract to provide matchday security for the four Rugby World Cup matches at Kingsholm Stadium in September 2015.
The contracts covered match day security, including the hospitality areas, car park security and any additional security requirements.
JS Facilities Group Limited has been running for 15 years and operates throughout Gloucestershire specialising in security services for sectors including commercial, logistics security, construction, events, key holding and alarm response.
Services include remote video monitoring, control room services, lone working monitoring, security guarding, door supervisors, mobile security patrols, event security and first aid training.
Scottish Pub Chain
Kelly Burton • Leisure & Hospitality • Pre-Pack Administration
The director initially approached Wilson Field for assistance with the drafting of a Company Voluntary Arrangement (CVA), following HMRCs refusal to allow the company a time to pay agreement. Wilson Field drafted a CVA proposal, which was rejected by HMRC, who then issued a winding-up petition.
Wilson Field then advised the director to his remaining options, of which placing the company into Administration was one.
Due to the petition, the director was unable to appoint administrators. However, following protracted discussions with the company’s debenture holder, it was agreed that the secured creditor would appoint Wilson Field, at the request of the director.
Insolvency practitioner and director at Wilson Field, Kelly Burton, said:
“After being refused a CVA by HMRC, the company received a winding-up petition and we were appointed Administrators after speaking with the debenture holder.
Although it was a tricky start, there was a good outcome as the assets and business were sold and 75 employees kept their jobs.”
A licence to occupy was granted to an associated company to trade the pubs, whilst a sale could be finalised post appointment.
The sale was completed to an associated party a number of months after appointment, and secured over 75 jobs.
Care Homes Claims and MS2U
Kelly Burton • Financial Services • Pre-Pack Administration
Jobs have been preserved at a Leeds-based group of claims companies after they were bought out of administration in a pre-packed sale.
Care Home Claims and MS2U worked with customers who had been mis-sold financial products and services including PPI or had been over-charged on care home fees.
Joint administrators Kelly Burton and Lisa Hogg from Sheffield-based Wilson Field were called in by the directors when the group faced financial difficulties.
The business and assets of the companies were sold, for an undisclosed sum, to Acquire Inc Ltd. As part of the deal, 32 employees of an associated company transferred to the purchaser.
Group managing director Joseph Battle said:
“Problems were encountered as a result of an unprofitable contract and accrued HMRC arrears which lead to a severe cash flow shortage. We took professional advice and worked with the administrators to enable the business to continue as a going concern and preserve jobs of existing staff. Despite this being a very difficult time, the outcome means the business can continue.
“With the same management team, we can assure clients the same high level of service in the future.”
Kelly Burton, director and insolvency practitioner at Wilson Field, added:
“These companies ran into difficulty following the over calculation of work in progress on a contract, coupled with an accumulation of HMRC arrears. The directors contacted us for advice and have worked closely with us to achieve this result.
“We are pleased that the restructuring of these companies has resulted in the businesses continuing to trade via the successor business.”
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