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Rose Lagram-Taylor, barrister at South Square, says that if the recommendations in a report by R3, trade association for the UK’s insolvency, restructuring, advisory, and turnaround professionals, are adopted, the company voluntary arrangements (CVA) insolvency procedure could become more attractive.
CVAs have dominated the news recently, with well-known high street brands using the procedure to restructure their debt. However, there has been growing concern that the procedure is being abused, with companies avoiding administration to the detriment of their creditors. Further, there has been a relatively high rate of failure, with 65% of the 552 CVAs commenced in 2013 being terminated without achieving their intended aims (although the report highlights that accessing the success or failure of CVAs is not straightforward).
The purpose of R3’s report was therefore to consider how effective or otherwise CVAs are in practice, and to investigate the outcomes where CVAs fail. In doing so, five main issues were identified:
The report made eight main recommendations:
Overall, it seems likely that different creditor groups will react positively to the report. Although CVAs tend to have a mixed reputation in practice, this report serves as a reminder that the alternative option, usually a winding up, is probably worse from the point of view of creditors. If the circumstances are right, and the CVA is executed properly, it can provide a good outcome. As this report goes someway to assisting with the proper execution of a CVA should its recommendations be implemented, creditors will be reassured that their interests are being considered and balanced with those of the company.
Landlords, in particular, should be pleased that their views have been taken on board. For example, their concern that a company’s management often fails to change its conduct in light of financial distress is addressed by the recommendation with regards to directors’ duties and the requirement to address financial distress earlier.
Further, their view that the length of time of a CVA is simply too long is clearly addressed by the recommendation that a CVA should generally not last any longer than three years. No more should it be that a CVA simply represents ‘a slow death by a thousand cuts’.
It is difficult to predict whether the recommendations will be implemented. However, the research makes a strong case for the government to back reforms which could drastically improve the effectiveness and reputation of a CVA. It is certainly hoped that the recommendations do become practice.
An important point highlighted by the report is that the early termination of a CVA is not necessarily indicative of the CVA having failed. However, the report points to the fact that while the CVA may not have achieved the purpose set out in the proposal approved by creditors, unsecured creditors nevertheless regularly receive dividends from the CVA contributions, which is often in excess of what might generally be expected in the likely alternative procedures of a pre-packaged administration or insolvent winding up.
Overall, and perhaps unsurprisingly, there are no clear patterns as to what factors lead to a successfully terminated CVA. A particular evidential problem is that there is no information on Companies House as to what may have happened without the CVA in the alternative of liquidation. As many CVA proposals predict a nil return to unsecured creditors in liquidation, any dividend would clearly be a better and more successful result.
If you are a LexisPSL subscriber, click the links below for further information:
CVAs—landlord issues and remedies
The CVA proposal and procedure—the position under the Insolvency (England and Wales) Rules 2016
Not a subscriber? Find out more about how LexisPSL can help you and click here for a free trial of LexisPSL Restructuring and Insolvency.
Interviewed by Stephanie Boyer.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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