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
Berks Healthcare Services Limited
Kelly Burton • Healthcare • Administration
Wilson Field has advised on the sale of a Slough-nursing agency which was bought out of administration saving all 7 jobs.
Berks Healthcare Services Limited, which traded as Enchor Healthcare Services, specialised in providing healthcare professionals for the public and private sector.
It supplied registered general and mental health nursing staff, together with unqualified support and ancillary staff, to private hospitals and care homes in the areas local to the company’s offices in Slough, Portsmouth, Birmingham and Luton.
The company, headed up by healthcare professionals, called in administrators from Wilson Field after suffering from a fall in turnover, which left it struggling to meet unsustainable historic legacy debt. It had also been issued a winding-up petition from HMRC.
Kelly Burton and Emma Bower were appointed as joint administrators on 14 June 2018 and concluded the sale of the business and assets for an undisclosed sum to an unconnected company Connect Care & Support Limited, also based in Slough.
Kelly Burton, director and licensed insolvency practitioner at Wilson Field said: “The company had a turnover in the region of £2.9m per annum in 2017. However this is a very competitive marketplace, which is primarily price driven and recent minimum wage legislation changes had also impacted on the company’s potential profit margins.
“As administrators, we sought a purchaser for the business.
“This pre-packaged sale to Connect Care & Support Ltd saved seven permanent jobs as well as numerous temporary agency staff.
“It has also mitigated employee termination claims in the nature of wage arrears, accrued holiday pay, redundancy and pay in lieu of notice estimated to total £29,576 as the liabilities have transferred to the successor business under the TUPE regulations.
“This means the business has a new future moving forward.”
Berks Healthcare Services Ltd was incorporated in January 2015, but can be traced back to February 2007. Enchor Health Care was recognised and registered as Recruitment Consultants providing both permanent & temporary staffing solutions to many different Health and Social Care settings. It also had supported living and rehabilitation centres.
Precision Engineering Business
Kelly Burton • Construction & Engineering • Administration
A bespoke precision engineering business, working predominantly in the automotive and aeronautical sectors, found itself experiencing cashflow difficulties caused by an increase in costs due to the uncertainties surrounding Brexit, and the loss of a key member of the sales team.
When the company’s largest customer reduced its spending by 50%, the director felt the business couldn’t continue and sought advice from the team at Wilson Field.
Wilson Field marketed the business and assets for sale, and a sale of the tangible assets was completed immediately following the administrators appointment, to an unconnected third party.
Kelly Burton, insolvency practitioner and director at Wilson Field, said:
“With so many complications surrounding Brexit, coupled with the loss of some key staff, the company experienced some cashflow difficulties it could not get out of.
There was a positive outcome in the end as some of the tangible assets within the company were sold, which meant a good return for creditors.”
Mercer Group
Kelly Burton • Construction & Engineering • Pre-Pack Administration
All 38 jobs have been saved at a Bolton construction trade company after administrators at Wilson Field sold the company in a pre-pack deal to existing management.
Joint administrators Kelly Burton and Lisa Hogg from Wilson Field were called in by directors of Mercer Group on 7 July 2017.
The company, based at Turton House on Wellington Road in Bolton, had suffered due to serious underpayments from clients resulting in VAT and PAYE arrears and issues with HMRC.
Mercer Projects Ltd bought the company for an undisclosed sum with all 38 staff from across the group being transferred to the new company under TUPE.
As well as saving jobs, estimated redundancy and holiday pay totaling almost £97,000 were mitigated resulting in a better return to creditors.
Kelly Burton, director and insolvency practitioner at Wilson Field, said;
“We are pleased that the sale of the company to Mercer Projects has resulted in all 38 jobs being secured and that the business will continue to trade.
“We determined that a pre-packaged sale would be in the best interests of creditors.”
Director Alison Mercer said;
“This has been an uncertain and very difficult period for Mercer Group but advice from the administrators at Wilson Field has made the whole process less stressful. Their communication and procedure and working closely with them has meant we have been able to keep all 38 staff.
“With our strong reputation within the sector as a multi trade company and with the same staff team, we were confident that the company has a viable future.”
Alison added;
“It is very frustrating when events which are outside of your control threaten the very existence of your business and the jobs of a loyal workforce. Working with our advisors and staff, the future of Mercer Projects now looks very positive and we are in a position to offer our customers the same high quality of products and service.”
The companies began as Mercer Brothers Limited in 2004 and D Mercer and Sons Ltd in 2009 as plastering only businesses and quickly evolved through training and business expansion into a multi-trade company, to become known as Mercer Group.
During a period of quadruple growth between 2012 and 2013, the company relocated its offices to Bolton and undertook work in both the public and private sectors including residential, educational, medical and commercial properties.
Areas of expertise included demolition, plastering, screeding, tiling, flooring, joinery, painting and decorating, structural and ground works and roofing.
It also worked in partnership with a number of local colleges and schools to provide apprenticeship schemes for 16-24 year olds to gain experience, skills and qualifications in the construction industry. Mercer Projects has continued to provide apprenticeships and currently has 4 apprentices who are working on our construction sites.
Gosschalks Solicitors of Hull advised and dealt with legal work with asset sales through Ian Maycock of Charterfields Surveyors in Manchester.
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