For a Company Voluntary Arrangement (CVA) to not be rejected, it must be supported by 75% of creditors (by value). The proposed document should be approved by more than 50% of the shareholders. However, not all CVAs are approved, some are rejected.
The CVA proposal is put together by the directors, and their advisors, before it is put forward to a licensed insolvency practitioner, to acts as the Nominee, prior to its submission to the court. A copy is then sent to each of the company’s creditors. It is then up to the creditors, to vote on the proposal.
Why might the CVA be rejected?
- If the creditors feel that the company is simply not viable, and the forecasts are unachievable.
- With regard to HMRC they will only support a CVA if the company has been compliant. So, filings and returns have been on time and within the rules and regulations, even if they have not paid the tax.
- Creditors feel that the company has been poorly managed and this not likely to change.
- Creditors want to put the company into liquidation so there is an investigation into the director’s conduct.
- The directors have taken too much money out of the company in the past and the creditors feel they are being unfairly treated.
- Some creditors are treated better than others – this is highly unlikely to result in a rejection as all unsecured creditors get a vote even if they are paid back the full amount. So the balance and likely votes will be worked out in advance.
- The CVA is poorly drafted and does not instil confidence in the process.
- Creditors believe (often wrongly) that they will get more money out of a liquidation or administration.
Many of these objections can be worked on in advance and any reputable professional adviser will not put forward a poorly drafted proposal that is likely to result in a rejection. Unfortunately, some practitioners sometimes propose CVAs knowing that a liquidation or administration is likely to be the ultimate end point and are just buying time. In many cases, practitioners have little experience of CVAs even though they are the best tool for the particular case and so put forward unrealistic expectations or fail to see problems in the business. In most cases the creditors need to be satisfied that there are going to be big changes in management systems, finance systems, costs etc.
It should be remembered that HMRC have seen lots of proposals over the years and will have a good idea as to what will work and what will not so if they are a major creditor it has to satisify them.
Despite the IP's efforts, not always do creditors agree with the proposed terms. Creditors may believe they can get a potentially higher return, from a more appropriate process, hence directors must re-think options and look to alternative processes to save the company:
- Administration: An administrator takes over your company, with the aim to return as much money to creditors as possible. Company assets may be sold to pay off the creditors’ debts, or the company can continue as a going concern. Whilst administrators do this, a moratorium is placed on the company, meaning no legal action can be taken against the firm.
- Pre-Pack Administration: An administration but the sale of the business is pre-arranged before administrators are appointed. It tends to be common for the company directors or shareholders buy the businesses assets and set up a new company, with a different name.
- Creditors Voluntary Liquidation (CVL): The company will stop trading and the assets of the business will be liquidated and turned into money for the benefit of the creditors. This option is preferred to a compulsory liquidation, which could be more damaging for the directors as there is mandatory investigation into their conduct. If a CVA is rejected then a creditor might well serve a winding up petition to force the company into liquidation. However they are more likely to allow the company to go into a CVL procedure. They may though appoint their own liquidator at the creditors meeting.
So, in conclusion, bear in mind that a CVA proposal needs to be fit, fair and feasible - as judged by the Nominee. A well drafted CVA, that covers these points honestly, is likely to have a good chance of being approved. Bear in mind though that the company's directors past history may have a bearing on the decision, particularly if HMRC are a major creditor.
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