CVA reforms needed, says insolvency and restructuring profession

Reforms should be made to improve the effectiveness of Company Voluntary Arrangements, a common High Street insolvency procedure, according to research undertaken by the University of Wolverhampton.

Insolvency and restructuring trade body R3 commissioned the University, along with Aston University, to examine the success and failures of CVAs, with the support of the Institute of Chartered Accountants in England and Wales.

They published an in-depth report ‘Company Voluntary Arrangements: Evaluating Success and Failure’ at the end of May.

It recommends a cap on CVA lengths, more time for companies to plan a CVA, clearer roles for directors and CVA supervisors, more engagement from public sector creditors, and the introduction of standard terms.

A Company Voluntary Arrangement (CVA) is a statutory insolvency procedure which sees an insolvent company and its creditors agree the repayment of a portion of the company’s debts over a set period of time. The existing management stays in control of the company, while an insolvency practitioner reviews the CVA proposals and checks the terms of the CVA are met once approved.

Although CVAs made up just 1.8 per cent of insolvencies in 2017, they often involve well-known brands. High Street chains Select, Carpetright, New Look, Prezzo, and Byron Hamburgers are among those reported to have sought or agreed a CVA so far this year.

CVAs have been said by some to have a high failure rate and questions have been asked about their benefits for creditors.

The research reviewed the progress of CVAs agreed in 2013, and found that 18.5 per cent of those CVAs had been fully implemented, 16.5 per cent are still ongoing, and 65 per cent had been terminated without achieving all of their objectives.

However, the research also reveals that 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.

Professor Peter Walton, Professor of Insolvency Law at Wolverhampton Law School, who said: “Whenever dealing with companies in financial distress, law and practice must strive to get the balance right between the rights of creditors on the one hand and the interests of other stakeholders on the other in order to ensure feasible businesses survive in circumstances that are transparent and fair. Not all companies in distress can or should be saved, but where they can be turned around, it is important to make turnaround processes as efficient and timely as is reasonable. Our report highlights a number of ways in which we believe CVAs can be made to work more effectively for the benefit of all stakeholders.”

R3 spokesperson Adrian Hyde said: “The CVA system already works well, but changes could see the procedure used more than alternatives, return more money to creditors, rescue more businesses, and improve confidence in the process and wider insolvency framework.”

To further improve the perception and performance of CVAs, the report recommends:

CVAs should be capped at three years

A pre-insolvency moratorium should be introduced

Directors’ and insolvency practitioners’ (IPs) duties should be more clearly defined

Public sector creditors should have to explain why they won’t support a CVA

Standard CVA terms and conditions should be introduced

Further information

Date issued: Thursday, 07 June 2018

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