Protect and preserve your business

The pandemic continues. 

Comments from Allan Cadman, Partner at Poppleton & Appleby and North West Chair at R3.

Seven months in and just a few weeks after a brief sense of light relief, we are now plunged back into an as yet, unknown period of severe restrictions on the fundamental freedoms that we ordinarily take for granted. A total of 7.8 million people and rising across the north of England are now in the highest alert level, not to mention the lockdowns affecting our Celtic friends and neighbours. This will give no comfort to the embattled business community.

The end of the CJRS (furlough) scheme at the end of October will be causing food for thought amongst the business community. Its replacement, the Job Support Scheme is not so generous as its predecessor and will not be suitable for all businesses. 

Other recent measures will have caused a muted sigh of relief, such as the ability to pay any deferred VAT over 11 months from March 2021, similar for self-assessment tax. Also, extensions to the CBILS period and additional funding. Businesses experiencing difficulty are also protected from the spectre of HMRC petitions until 1st January 2021.

The focus throughout the pandemic has been forbearance and rescue and recovery. In other words, profitable businesses should be protected from the worst economic effects of the pandemic and should not be lost purely as a consequence of Covid. 

Our industry has reacted quickly with, amongst other measures, the introduction of the Moratorium and the Restructuring plan which have been the subject of previous blogs. 

Company Voluntary Arrangement (CVA)

I want to focus, however, on a process that has been around since 1986: the humble, much-maligned and often mistreated Company Voluntary Arrangement (CVA). At the start of the pandemic, numbers of CVA were expected to rocket as businesses sought to protect themselves from creditor pressure. The government response packages, however, have so far performed this task. 

The CVA is a rescue and recovery procedure in it’s purest form and that rescue and recovery is the nation’s focus. It is therefore staggering to note that there were only 15 CVA’s approved in August, rising to a slightly less paltry 31 for September in the whole of England and Wales. This demonstrates to me that SME directors are not heeding the advice of our industry to seek advice early, keep options on the table!

Whilst the new restructuring plan is considered to more appropriate for large businesses with more defined stakeholder groups, the CVA is far more suitable in the SME world either taking advantage of the new Moratorium or not, where appropriate.

A CVA is a relatively simple concept. It is a contract between a company and its creditors, where after due diligence, a better outcome for creditors is proposed than would be the case in liquidation or administration. It is the only ‘debtor in possession’ process available under insolvency legislation where once approved the Insolvency Practitioner operates in a light touch supervisory role, with the day to day running of the business remaining with directors.

A CVA proposal is bespoke to an individual business. The basic provisos are that there is an optimal return to creditors and that the company will remain viable for the duration of the CVA and beyond its conclusion. It is subject to creditor approval (75%) of unsecured liabilities, including HMRC. It does not involve secured creditors, e.g. banks, though it would be foolish not to consult them at the outset. Once approved it binds all unsecured creditors to its terms.

CVAs are usually put forward as an alternative to administration or liquidation. The current COVID climate where the outcome is no more certain than it was seven months ago has caused our profession to consider businesses which are ostensibly solvent and would be able to continue satisfactorily but for the pandemic. 

Such businesses may or may not be able to trade currently, but maybe becoming increasingly alarmed by the imminent contraction of government support. Our industry, through its principal representative body, R3 have introduced a CVA proposal template aimed directly at SME companies who may have such concerns. 

The concept of an introductory period whilst a company is not trading and a ‘breathing space’ period whilst trade is re-established are brought in where a company would not be required to make payments towards its ringfenced liabilities, which would ordinarily be expected in a CVA. Monthly contributions would commence after the pre-ordained ‘breathing space’ period.

This is not to be viewed as a panacea and is subject to the appropriate advice of a regulated Insolvency Practitioner in terms of suitability and the usual rules of acceptance to creditors. HMRC have been consulted and have given the concept their tacit approval but will treat each case on merit, using their standard criteria.

This is an additional hybrid mechanism aimed at supporting the business community through the pain and uncertainty of the situation. A CVA is also an out of court solution and therefore, a low-cost alternative.

Should you or your client want more information or a free consultancy, you can contact our partners and team or send us a query via our contact form.