In many cases a CVA can represent a creditors best option for recovering the maximum possible of the debt owing.
Company Voluntary Agreements (CVAs) offer an important lifeline to those insolvent companies that still have good operational models but a weighed down by debt they can’t afford. To the insolvent directors a CVA will generally be universally attractive, with the few downsides being far outweighed by the many positives.
But what about the creditors of that company? Does a CVA offer value to them? Is it something that should be accepted and can it even be refused?
This arrangement is obviously advantageous for the debtor, but what does it mean for that company’s creditors?
The first thing to note is that a CVA is only binding to unsecured creditors, the debtor can still face debt recovery and legal actions from their secured creditors. This means that even if the debtor follows the CVA agreement to the letter and are experiencing favourable trading conditions, their secured debt load can still lead to insolvency. Especially as secured loans tend to be high value.
However, an insolvency practitioner will factor the secured debts of a company into their decision as to whether a CVA is an appropriate and viable option for an insolvent company.
Typically a CVA will restructure the company’s debts to be paid out over a longer timeframe (often between 3 to 5 years) and may involve the amount owing to creditors being reduced. Meaning that a CVA will do little to improve the short term cashflow of a creditor.
It also means that creditors lose the ability to chase the debtor for repayment as no debt recovery processes are allowed to be pursued.
Whilst a debtor must be insolvent to enter into a CVA, it is an alternative to insolvency proceedings and the investigation into the actions of the directors in the lead up to the insolvency that would usually take place does not. This means that any incompetence or illegality which may be key underlying causes of the business failure may not be uncovered.
On the surface it may seem like only the insolvent debtor sees any real advantage from a CVA and debtors get a raw deal, with them having to wait longer for their money and even them potentially a lesser amount.
However, when faced with the decision to accept a CVA, debtors should understand it is an opportunity to avoid a negative (or more negative) outcome.
This is because should I the company be declared insolvent any unsecured debtors (which are the ones covered by a CVA) are unlikely to recover any meaningful amount of the money they are owed. This is because payments made to creditors in insolvency proceedings follow a strict hierarchy, of which unsecured creditors are at the bottom.
So a CVA represents a significantly better chance of recouping more money than should they refuse it and rely on insolvency proceedings.
All unsecured creditors are afforded the opportunity to vote on whether to accept a CVA with acceptance conditions being as stated previously in the article.
Whilst a CVA dictates that creditors can not pursue debt recovery processes it is also a legally binding agreement. This means that is the debtor does not match the terms agreed then creditors can pursue legal action.
Should a CVA be accepted it is still possible for it to be challenged, though only in the first 28 days.
A creditor can challenge on two grounds:
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