R3’s roundtable on Company Voluntary Arrangements (CVAs)

10 July 2018

With Company Voluntary Arrangements (CVAs) hitting the headlines over recent weeks, we thought it might be interesting to provide readers with a summary of the stakeholder roundtable R3 held earlier this year to discuss the then-preliminary results of our research report ‘Company Voluntary Arrangements: Evaluating Success and Failure’.

By way of background, R3 has been considering ways to reform the UK’s corporate insolvency and restructuring framework and, with support from ICAEW, commissioned academics from the University of Wolverhampton and Aston University to explore why CVAs succeed or fail, and how they could be improved. The full paper can be found here; a summary of the report’s findings and recommendations can be seen below.

R3’s roundtable brought together a range of stakeholders from government, the business community and the insolvency and restructuring profession, to discuss the specific findings from the research, as well as the broader issues that affect their success or failure as a restructuring tool.

Among the many points raised, there were several common themes: HMRC’s role in and approach to CVAs was a cause for concern, although there was recognition that HMRC, as an involuntary creditor, can be in a difficult position; there was agreement that a ‘good’ CVA features new funding and serious restructuring; and there was recognition that CVAs can lead to a better outcome for creditors than liquidation and administration, although the extent of the difference is not always clear-cut.

Key areas of discussion

One point which was widely accepted at the roundtable was that often the only alternative to a CVA is another insolvency procedure and, more often than not, a worse outcome for stakeholders. Even a CVA ‘failure’ can still provide a better outcome than a liquidation or administration for creditors.

Looking at the practicalities of CVAs, one of the main issues identified by the research was that of length. CVAs typically last five years, but, the research shows, long CVAs increase pressure on the struggling company, increase the risk of the CVA being terminated, and do not guarantee better creditor returns. There was broad agreement that CVA lengths should be capped.

Another key area of discussion was the approach of public sector creditors (HMRC in particular) to CVA proposals, and the role they play in supporting or hampering these proposals.

A number of insolvency practitioners felt that greater clarity was needed from HMRC about its approach to supporting CVA proposals. Many thought that a more commercial approach from HMRC would see more CVAs approved (and therefore better returns for all creditors). Others noted, however, that HMRC has a statutory duty to protect taxpayers, and not necessarily to make commercial decisions. Indeed, there was some appreciation for the fact that HMRC can take a cautious approach to CVAs given that, in many distressed business situations, it has already lost money and will be seeking to prevent further losses. HMRC’s position as an ‘involuntary’ creditor can be a key factor in decision-making, too.

While there was some debate about this issue, most attendees accepted that it would be helpful for HMRC and others to be more transparent about the reasons why CVA proposals are rejected – doing so would enable those proposals to be amended and improved.

Company Voluntary Arrangements (CVAs): Evaluating Success and Failure

General conclusions

• The biggest strength of a CVA is its flexibility.
• The early termination of a CVA does not automatically mean failure: terminated CVAs may return more money to creditors – the ultimate goal of any insolvency procedure – or otherwise be more beneficial for creditors than an administration or liquidation.
• An analysis of the 552 CVAs commenced in 2013 involving companies in England and Wales showed:
  • 18.5% were fully implemented;
  • 16.5% were ongoing at the survey date;
  • 65% were terminated without achieving their intended aims;
• CVAs with the benefit of a moratorium – either from the existing 28-day pre-CVA moratorium available to small companies, or the moratorium provided by an administration – were terminated in only 20% of cases.
• Often directors do not implement necessary changes or fail to identify and tackle fully the problems identified in the CVA.
• HMRC is seen as the most engaged creditor but also the one most likely to vote against a CVA whether for policy or commercial reasons.
• The UK’s insolvency and restructuring framework is slipping in the World Bank’s ‘Ease of Doing Business’ rankings and lessons may be learnt from the World Bank principles and other international insolvency developments.

Main recommendations

• CVAs should be capped at three years – CVAs typically last five years, but, the research shows, long CVAs increase pressure on the struggling company, increase the risk of failure, and do not guarantee better creditor returns.
• A pre-insolvency moratorium should be introduced – Companies which used an existing, limited pre-CVA moratorium from creditor enforcement action, or which used the moratorium provided by administration, tended to have a higher chance of completing their CVA. The pre-CVA moratorium should be expanded to all sizes of companies, simplified and should be available for use ahead of any insolvency procedure. The moratorium would give companies more time to plan a CVA free from creditor pressure.
• Directors’ and insolvency practitioners’ duties should be more clearly defined – Directors should be required to address financial distress at an earlier stage than now, while the insolvency practitioner’s role in a CVA should be clarified and reporting enhanced. Consideration should be given to extending the existing system of insolvency fee estimates to CVAs.
• Public sector creditors should have to explain why they won’t support a CVA – The research found HMRC was the most likely creditor to oppose a CVA but that it provided little feedback on its reasons for doing so. This prevents an effective negotiation – and sometimes leads to a company’s administration or liquidation, which can undermine returns to creditors, including the taxpayer.
• Standard CVA terms and conditions should be introduced – Standard terms would improve the consistency of CVAs, reduce costs, and help build knowledge among stakeholders about how the process works.