A step by step process of putting a company into a CVA
Step 1 Appointment of Advisors
Directors appoint advisors like turnaround practitioners or insolvency practitioners (IPs) such as KSA Group to assist in constructing the proposal.
Step 2 Company Review
KSA Group will undertake a review of the company, its people, markets, and systems. This includes preparing a detailed formal proposal to the company’s creditors, a statement of affairs, a comparison between liquidation, administration, and CVA outcomes for all classes of creditors. A team of financial forecasting experts assists in building realistic and achievable forecasts. This involves questioning all financial information and estimating sales conservatively.
Step 3 Proposal Drafting Period
Whilst the proposal is being put together the company should not significantly increase or decrease debts to any creditor during this period. Suppliers should be paid for supplies made, and the company’s operations continue as usual. During the CVA production or “hiatus” period, current assets such as WIP and debtors are collected. The CVA process allows the company to reduce employment and overhead costs, which wouldn’t ordinarily be possible. This includes terminating employment contracts, exiting rental obligations, and reducing other onerous costs. This increased liquidity should be used to fund the difficult period between appointment of advisors and filing the CVA proposal document at court.
Step 4 Payments to HMRC
In addition, the company normally does not need to pay PAYE, NIC or VAT in the hiatus period as HMRC generally proves the debt to the date of the creditors meeting. However, it is prudent to start paying these taxes if the preparation is taking a long time as it demonstrates to HMRC that the company is viable going forward.
Step 5 Talk To Secured Creditors
Although the secured creditors are not bound by any proposal it is a good idea to involve them rather than them finding out by other means. If they can see that you are able to put the company on a stronger footing they shouldn’t be worried about their exposure.
Step 6 Proposal Finalisation
Once the draft CVA model is ready, it’s reviewed by the Nominee, who has to be a licensed insolvency practitioner, to ensure its appropriate, achievable, and maximizes creditors’ interests. They will interview the directors as part of this process.
Step 7 Creditor Consideration
The proposal is sent to all creditors, who then consider it for a minimum notice period before the decision-making process (creditors meeting).
Step 8 Creditors Meeting and Voting
At the meeting the creditors vote on the proposal and the proposal will be approved if a majority vote of 75% by value of the total value of creditors at the meeting (whether in person or by proxy) vote in favour. A second vote excluding connected creditors is taken and provided that not more than 50% of creditors vote against the proposal it is approved. So remember it is not 75% of all creditors, it is 75% by value of those votes cast.
Step 9 Shareholders Meeting
Simultaneously, a shareholders meeting is held to decide whether to accept the proposal. A vote of 50% in favour is required.
Step 10 Approval
If both meetings approve the proposal, the chairman issues a report to all creditors and the court. Once approved, all notified and included creditors are legally bound for the debt “frozen” in the proposal.
Step 11 Payments to creditors
The company must make agreed contributions to a trust account administered by the CVA supervisor. Failure to keep up with contributions can lead to the arrangement being aborted, usually resulting in liquidation or administration.
Even if the approach outlined here leads to small repayment levels of 30-50% to unsecured creditors, the creditors usually prefer sensible contributions to hopelessly optimistic forecasts. Provided the company conforms to the CVA proposal and makes its contributions, then the CVA continues for the agreed period. The supervisor is generally not involved in the business (in our CVAs). THE DIRECTORS REMAIN IN CONTROL. If the company is not performing well and yet it would still appear to be viable, then it is theoretically possible to reconvene the creditors meeting at any time to ask the creditors to consider amendments. If the Supervisor has concerns, he can also ask the court for directions. In most cases the directors should inform the supervisor if there are any material changes to the company or its business.
What happens at the end of the CVA period?
Once the agreed period is completed and the supervisor has issued a completion certificate, then the company leaves the CVA state. Any remaining unsecured debts (where partial repayment was approved) are written off and the directors continue to run the business for the shareholders.