Paul Dounis, partner in Begbies Traynor Group's BTG Restructuring division
One of the trends to emerge from the challenging economic environment has been the increased use of the Company Voluntary Arrangement or CVA, a legal procedure which enables a company to make a binding agreement with its creditors outlining how its debts and liabilities will be repaid.
Historically, CVAs were fairly rare, as a firm we probably only handled a couple a year across Scotland, however, we’ve seen a marked increase recently, negotiating four CVAs in the last six months.
No doubt the high profile failed CVA of Rangers will also help to push the procedure into the mainstream and we expect the phenomenon to continue.
Introduced by the Government in 1986, the CVA is a strategically valuable tool designed to enable viable companies to continue to trade by buying them the time they need while a rescue and turnaround is put in place.
Rather than struggling under the full weight of the legacy of debts, companies can negotiate with creditors for some liabilities to be discounted and the debt deferred via a legally binding moratorium, allowing the company to survive and an agreed proportion of its debts to be repaid.
If suppliers are to accept the compromise presented by a CVA, it is vital that there is evidence that something has fundamentally changed within the business which will give them sufficient comfort that the business will be viable going forward.
There’s no doubt that in the current climate, creditors are more willing to be flexible and work with a debtor to enable it to continue to trade and by doing so safeguarding that customer for the future and protecting its own revenue stream at a time when replacing lost turnover is challenging.
Before proposing a CVA is it essential to understand not only what factors might convince the creditors to accept a compromise, but also exactly where the voting sits.
The key to negotiating a successful CVA is being able to demonstrate to creditors that the outcome of the CVA will result in a greater return than that which would result from the liquidation of the company.
This is typically achieved via either the introduction of third party funds in full and final settlement of existing liabilities or by the business and its advisers demonstrating that the business can generate sufficient profits from future trading to repay an agreed sum to creditors over three to five years.
The common pitfall, however, for stakeholders, particularly under the latter proposal, is demonstrating that something has fundamentally changed within the business to allow it to generate profits given its poor trading history.
This is usually achieved through the introduction of a more senior, experienced management team or the development of a new product or service.
We see the increase in CVAs as a very positive trend and it is up to practitioners to ensure the device continues to be considered when advising businesses in distress.
Generally, creditors are adopting a more pragmatic approach and seem prepared to consider the comfort of a deal which sees some returns for them and the continuation of a customer in preference to the winding up of the company.
However, a CVA is unlikely to succeed unless professional advice is sought and robust business plans are prepared which convince creditors that the business has a viable future.
Paul Dounis is a partner in BTG Restructuring, part of Begbies Traynor Group