Friday, 24 February 2012

Can A CVA Save Rangers

CVAs or Company Voluntary Arrangements are at the forefront of the sports news in Scotland but they are one  of the least used restructuring tools in an Insolvency Practitioners toolbox.  In Scotland, there are only around 5 every year.

So, what is a CVA?  Essentially, it’s a compromise arrangement between a company and its creditors. The company is saying “We’re sorry but we can’t afford to pay our creditors in full.  However, we’d like to make you an offer to pay a percentage of our debt and for you to accept that in full and final settlement.”  So, essentially, it is a deal between a company and its creditors.

A CVA is contractual in nature but the contract has some peculiar features.  It cannot vary the rights of secured or preferential creditors without their consent.  Secured creditors are those who hold either a Standard Security over the company’s property or who hold a Bond and Floating charge over moveable assets – debts due to the company, for example.  Intellectual property like Trademarks or Brands can also be secured.  Preferential creditors are usually employees for unpaid wages or holiday pay.

However, provided the requisite majority is obtained, it is binding on ALL creditors, even those who object to it.

Finally, unlike any other UK insolvency process, the directors remain in control throughout the entire procedure.

So, how would you go about putting a CVA in place?

Having identified that an Arrangement is a suitable option for a client, the first thing you have to do is identify key stakeholders – usually the company’s bank and any other secured creditor.  You’ll remember that the rights of secured creditors cannot be varied without their consent so it’s important to get them on board from the outset.  So you’d also be talking to any HP and leasing creditors in respect of key items of kit.

The directors need to consult an insolvency practitioner.  Why?  The IP acts as a ‘Nominee’ and it is the Nominee’s job to put forward the Directors’ proposal to the company’s creditors.  You should note that it’s not the IP’s proposal but the directors’ proposal.  The role of the IP at this stage is to review the proposal and to put it forward only if he/she considers that it is reasonably likely to be accepted by creditors and to be achievable.  The Directors will be responsible for achieving key milestones  to make the deal work– whether it be cost cutting, relocation, boosting sales or whatever – it’s down to the company’s directors to deliver.

So what would a proposal for a CVA actually look like and what would it contain?  By nature, since the company is asking its creditors to write off some of the money which they are rightfully due, there is a requirement to make full and frank disclosure of the company’s financial affairs.  So as well as details of its assets and liabilities, creditors should expect to receive some information about the background to the company and its current difficulties , as well as financial projections – cash flows, forecast P&Ls etc - to allow them to assess whether the company is fundamentally sound or has a reasonable prospect of survival in the longer term.

The proposal is then sent to ALL the company’s creditors, including HMRC, the Bank or any other secured creditor and any HP or Leasing companies.  Because the CVA is contractual in nature, creditors are allowed to propose modifications which are voted on at the meeting which is called to approve it.  In practice, the IP and the directors would identify the key stakeholders and ensure that they are happy with the proposal and prepared to vote in favour of it BEFORE the meeting.

The CVA is approved if 75% by value of those voting at the meeting vote in favour of it.  Votes can be cast in person or by proxy.

In the case of Rangers Football club, it’s likely that HMRC will have a key role to play in deciding whether a CVA should be approved simply because they seem to be a significant creditor.  So, besides a proposal which would see a significant payment being made to them, what might they and other creditors want to see in a proposal?

MLM does not work with such large businesses but we do CVAs for smaller companies.  So, what would we look for before putting forward a CVA proposal?  We’d be looking for a sound underlying business with reasonably dynamic management ready and willing to do whatever is necessary to allow the business not just to survive but to thrive.

We’d expect to see some or all of the following:

Good strategy and good management

•  Management remain in control of the business so stakeholders need to have confidence in their ability to   deliver
Is there a business plan in place?
Is it realistic?

Good business

Is there a profitable core business?
Is the problem an isolated occurrence, a one-off event?
Will key creditors back a rescue plan?

Financial Control and Management Information

Is there enough cash to meet immediate needs?
Is there good Quality financial and/or management information?
Are there realistic budgets and can management stick to them?


Any litigation pending?
How much luck will we need?

CVA is not an easy option.  They usually involve some tough business decisions but if the will to survive is strong enough, they’re a great tool to shake off historic problems and face a more profitable and successful future.