slides on the cva mechanism

A Lifeline for Business

KSA Group

Company Voluntary ArrangementSeminars for TMA UK

CVAs in Action

Gateley Birmingham18th September 2012


CVA Seminar Agenda

• What are Company Voluntary Arrangements?

– How do we use his powerful restructuring tool?

• How they can restructure a business

• CVA v PPA!

• Case Study

• Summary

• Q&A

www.companyrescue.co.

uk


CVA: the Best Recovery tool?

• Why don't CVA’s get used in the UK?

• Fewer than 800 last year

• Government wants Company Rescue mechanisms to be used – CVA and Administration

• But insolvency professionals have ignored

• HMG does not promote them

• Most advisors not up to speed on them

www.companyrescue.co.uk


The Statistics Don’t Lie!

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2005 2006 2007 2008 2009 2010

No

Co

mp

anie

s

Insolvency Procedure by Quarter by Type

Admins

Wound up

CVL

CVA


So what is a CVA?

• Flexible deal structure– Pay “X” pence in £1 over “Y” period to be agreed

• Control – directors remains in control

• Time – defined period to conclude the deal

• Cost Effective

• Terminate unwanted lease obligations, contracts and staff– Case study on this later

• Flexible and powerful



History of the CVA

• The History of the CVA

• Recessions of 1970’s and 80’s no rescue tool– Liquidation and receivership for companies

• Government mandated Lord Cork (Cork Gully) to set out new Insolvency Act

• Introduced the concept of CVA & Administration– Part 1 Insolvency Act 1986 is CVA

– Part 2 is Administration

• “Company Rescue” approach was born



Part 1 Insolvency Act 1986

• I use these words to describe CVA to potential clients– Very loose framework of sections and rules– That set out the basics of the CVA– Non prescriptive - offer a deal to company creditors– Suggest a blank sheet of paper to start the process

• Providing fit, fair and feasible and compliant and • if 75% creditors, by value, agree• You have a deal that is legally binding

– Compromises creditors debts – Moratorium protects the company when approved



Learning more?

• We don’t have time for a full session on CVAs

• So...please see our

• Expert Guide to Company Voluntary Arrangements contained on your free Professional Toolkit

• It also covers all other options too

– Is not that technical!


uk


CVA Case Law

• These are vital Appeal Court cases

• Doorbar v Alltime Securities

• Re Cancol

• Park Air Services



How will a CVA terminate a contract?

• Why is a CVA so powerful? Simply put - CREDITORS!

• IA 86 & case law allows for a voluntary arrangement to compromise a creditors debts– Unsecured tax or trade is easy to understand

• Contingent creditors or unascertained creditors are in essence “future creditors”– Unliquidated claims

• Therefore a CVA can bind them – Case law was needed to prove this

– Doorbar v Alltime Security perhaps the most important case law of them all for CVA’s



Doorbar v Alltime Security(1994) BCC 994)

• The Court of Appeal dismissed appeals by Alltime from two decisions of Knox J in which he held that a debtor's future liability under a lease was included in an individual voluntary arrangement and that there was no unfair prejudice or material irregularity in approval of the arrangement

• Thus “unascertained” or future creditors can be bound by a voluntary arrangement

• It is important to note that in Re Cancol Ltd (1995) the ability to include future rent extends to CVAs as well as IVAs

• Therefore, can argue this applies to all contracts in essence• EXAMPLES? JJB Sports plc, Blacks Leisure plc, Travelodge



What does HMRC think?

• Combined Voluntary Arrangement Service (VAS)

– based in Worthing, all cases go to VAS

• Tax collection teams across the UK know about CVA’s

– They collect and use field officers, CCJ’s and distraint

• Enforcement & Insolvency Departments

– Enforcement & Insolvency is typically one step from a WUP

– They issue 7 day warnings after failed TTP’s

– Would prefer a CVA to nil collection but wont wait for ever

– MUCH MORE AGGRESSIVE NOW



HMRC Action

• We hear this everyday: “HMRC WILL NOT SUPPORT CVAs”

• Rubbish, perpetuated by ignorance

• HMRCs own 7 day warning letter advises debtors to consider CVA!

• Will support CVAs that are fit, fair and feasible


uk


Administration versus CVA?

• The big issues are– Directors not in control after admin– They or third party have to buy the assets– Statutory conduct investigation once liquidated– Marketing damage– Damaging to asset values– So called “stiffing” of creditors

• Pre-packs under attack now – SIP 16– Still a powerful tool but numbers falling– Element of surprise and speed removed by SIP 16

• CVA Hive Down or Hive Out can achieve the same thing



CVA Downsides

• We file a CVA certificate at Companies House

• Because credit rating agencies do not understand CVAs, all credit rating lost

• Tendering for Government work impossible

• Eh, what about the RESCUE CULTURE?



CVA Hive Down

• Solutions ?• The hive down, or hive out• What is a hive down? • Simple transfer of business and assets to new subsidiary

– in exchange for shares & probably a management fee, this pays for the CVA

– Newco has a credit rating!

• What sectors?– Construction sector– Public sector– Bank’s cost of capital

• Hive out?– Effect M&A of business, avoid pre-pack meltdown– Creditors get dividend, supply newco



CVA Summary

• The company voluntary arrangement tool is– Flexible

– Powerful

– Terminate contractual obligations, leases and costs

• Done properly allows a deep restructure of the client’s business

• Not a panacea

• Change needed - management especially

• Preserves clients for you to work with



A Real Life CVA Case Study

• We shall call it ABC Retailer Ltd

• Designer importer &retailer of high end furniture & fashion items

• London based

• Warehouse, 7 stores, web sales

• Lost £450,000pa 2008-9, same again 2009-10

• Blamed stock and warehouse problems


CVA Case Study

• What we proposed• CVA led restructure strategy

– Contains creditor pressure, KSA control HMRC and trade creditors daily: sharply improves cashflow

– Sharply reduce risk for RBS• Bank loans continue or may need to increase loan term• Repay Lombard facilities over time as per contract• Trade out orders taken & cash held to mitigate claw backs on

Streamline

– Refocus directors on running the business (not firefighting)

– Revitalise the board and management


CVA Case Study

• Hold aggressive retail sales– In closing and retained stores, warehouse and online– Drive cashflow into the business– Converts current asset of stock into cash, get rid of poor stock– We brought the M4 to a standstill one Saturday am!

• Close marginal stores, reduce headcount with nil or modest cash cost– Doorbar v Alltime Securities case law to terminate FOUR

unwanted shop leases– Protect mail order, web and well performing stores– Make retail staff redundant immediately– Use RPO to meet claims


CVA Case Study

• KSA assisted with redundancy process

• Redundancy Payments Office meets redundancy and lieu of notice claims of the leaving employees

• Nil cash cost for company

– Sharply reduce fixed costs and overheads

• Plan to close warehouse operation

• Outsource warehouse and fulfillment processes

• Net saving over fixed rent cost £300,000 pa


CVA Case Study

• Shop closure reduces fixed costs & overheads of £800k pa

• Total direct costs reduced by £1.265m

• Overheads reduced by £967k

• Fifty FT jobs and 20 PT jobs lost

• Sales forecast at £5m year one


CVA Case Study

• KSA recommended that MD should stand down as MD.

• Son took over

• Introduced new heavyweight non executive director, 3 old NED’s were removed

• New operations director appointed


CVA Case Study

• We discussed position with Global Restructuring Group (NatWest) and manager

• Bank supportive but – wanted overdraft repaid (£150k)– Lombard asset finance facility to be paid in full, (obtained

capital holiday)

• Crucially Streamline facility continued– Risk of huge refunds if closed the company

• £1.5m of unsecured creditors will receive 30p in £1• HMRC was owed £491k – voted in favour• Has paid excess profit ratchet in year one


CVA Experts

• Spotting CVA cases

• Please pass us any sightings!

• If you want support and training we can provide this

• Please pass on the CVA message and

• KSA’s standard modus operandi– Free meetings, assessment of options for clients

– Set a rescue strategy and then issue written

– SOLUTIONS REPORT for your struggling clients

• KSA is not a competitor- no tax, audit or accountancy


CVA Summary

• CVA is the best recovery tool for so called “zombie” companies, those threatened with winding up and or in need of deep restructure!

• Finally today we have an announcement

– www.company-voluntary-arrangements.co.uk

– New website for the CVA market!

– Please join in the debate on line

• Any questions?


http://www.company-voluntary-arrangements.co.uk/





slides on the cva mechanism

Documents

uka lifeline

unascertained creditors

company creditorssuggest

company rescue mechanisms

businesscva case lawthese

case studysummaryqa

important case law

thisdoorbar v alltime