To put CVAs into context, how has their use changed in recent years compared to other insolvency procedures?
CVAs are not really comparable to other insolvency procedures, so in a sense it does not make sense to ask how their use has changed compared to the other regimes. What can be said however is that CVAs are more common than previously and that they are being used most notably in businesses with extensive leased property portfolios - primarily as a way to shed non-performing retail units. Historically one was most likely to see CVAs being used to address debt that had already been accrued rather than as a mechanism to get rid of future liabilities.
Other than the clear pressures facing retailers, why are CVAs so prevalent now – and apparently more popular than other forms of rescue/restructuring package?
I am not sure that it is correct to say that CVAs are more popular than other forms of rescue/restructuring package. I presume that when this question refers to " rescue/restructuring packages, it is referring to "formal" processes (i.e. liquidation, administration and receivership"- not informal processes - such as bank refinancings or arrangements with creditors that are not CVAs . Receiverships rarely occur now because of a legislative change in 2003 and liquidations are not a rescue process at all. Accordingly the only true comparator would be administrations. Administrations outnumber CVAs by approximately 5:1 in any year and in fact the numbers of CVAs have declined annually since 2009 (there was a massive spike in 2012 and a slight (but arguably not statistically important) increase at the end of 2017)) . What we have seen is that CVAs are often now used in respect of businesses that the public have heard of - retailers and restaurants- and so the CVA is deemed newsworthy and gets press coverage. That paints a misleading picture of how prevalent CVAs are compared to administrations. What is important is that the CVAs that are occurring are often of fairly large businesses with multiple outlets and considerable numbers of employees and creditors.
What would you say are some examples of 'good' CVAs and, briefly, why?
What would you say are some examples of 'bad' CVAs and, briefly, why (please do not include Carillion.)
I don’t think it is meaningful to attempt to call one CVA a "good" CVA and another CVA a "bad" CVA. There is no moral issue here at all and how the affected parties view the effect of a CVA will be extremely subjective. In every CVA (as in any insolvency process) creditors will have their legal rights prejudiced to a greater or lesser extent. It is in the very nature of insolvency that it is impossible for everyone to get their legal rights fulfilled in full. All such processes are therefore to some extent detrimental to the interests of parties. Whether such parties would consider a CVA to be "good" or "bad" would depend upon what the CVA does to their own particular interests. Even though one party's rights may be substantially prejudiced (or indeed wiped out entirely) the CVA will be intended to ensure that the debtor company itself survives with all the wider societal benefits that that gives (e.g. jobs are saved, a trading business continues giving landlords a continuing tenant and suppliers a continuing customer). The alternative is not - no CVA at all - but is rather likely to be administration or liquidation with creditors likely to suffer a greater prejudice than they would have suffered in a CVA.
CVA is a democratic process - creditors can approve it or disapprove it and broadly speaking, a 75% majority approval is required. So if a sufficient number of creditors consider that a CVA is just too "bad" to stomach, they can vote it down and it will not come into force.
As briefly as possible, what would you say are the greatest strengths and weaknesses of CVAs and, on the basis of your own knowledge and experience, what are the chief reasons why they tend to work or fail?
In my view, the greatest strength and the greatest weakness of CVAs is their flexibility. There is very little black letter law about CVAs and accordingly just about anything can be proposed in a CVA. The only real brake on what can be proposed is the right that a creditor has to challenge a CVA if it is "unfairly prejudicial" to the interest of that creditor. Flexibility is a good thing because every business is different and CVAs can be adapted to suit the position of that individual business. However, the lack of a minimum standard for CVAs means that the rights of creditors can be pushed to the point of extinction. The uncertainty over the voting rights to be given to future creditors, (for example landlords in respect of the unexpired period of a lease), means that those rights may be disproportionately affected by the process.
Would you say CVAs represent a significant part of the workload and fee income for your own firm and for the insolvency/accountancy profession overall and how has this changed in recent years? How do CVA fees differ from the fees associated with other insolvency procedures?
No - not for my firm. Some firms probably do derive a significant proportion of the fee income from CVAs and it is likely that will have increased in recent years. Some firms are more active promoters of CVAs than others.
I am not sure that it is particularly meaningful to compare fees charged in one insolvency process as against another. The work and risk involved is different.
Do CVAs protect the interests of management ahead of creditors and, in your experience, what do creditors feel about them – especially landlords, who have been forced to reduce rents? Do you foresee increasing creditor resistance to the use of CVAs?
In so far as the purpose of a CVA is to ensure the survival of a company as a going concern, it is certainly the case that CVAs do of course look after the interests of management in the sense that the survival of the business will mean that the management still have a business to manage. Of course creditors are necessarily prejudiced by the CVA, but again the important thing to focus on is that the alternative to a CVA is not that things remain the same (with creditors having 100% of the rights), but is rather that a different process is likely to occur pursuant to which the rights of creditors would also be diminished/prejudiced.
The position and view of creditors over the years has probably softened towards CVAs as a greater understanding has been gained amongst creditor groups. There is undoubtedly an "instinctive hostility" towards CVAs amongst creditors and particularly among those groups of creditors who appear to be habitually impacted by the use of CVAs (landlords being the standout example). The position of landlords is not necessarily akin to the position of other creditors and CVAs because of the way that CVAs are now being used to shed future leasehold liabilities. Most creditors when faced with a CVAs are being asked to take a write down of historic debt. With landlords, the position is different because it is often their future rights/income that are being attacked.. Other creditors can simply refuse to supply in the future (but that of course will reduce their turnover), whereas landlords may be effectively obliged to continue to supply the lease premises at a lower rent. It is well known that landlords are now banding together to work as a group to oppose those particular CVAs that they consider are unduly detrimental to their interests. Legal challenges by such groups of landlords have been mounted, but as yet, none appear to have been fully worked out through the Courts, with the company proposing the CVAs being more likely to attempt to renegotiate the position of landlords in the CVAs rather than face the uncertainty of a court process.
Do you think practitioners in Scotland are more sceptical regarding the benefits of CVAs and, if so, why?
There is no doubt that historically the CVA numbers in Scotland have been proportionately lower than elsewhere in the UK. That is not to say that Scottish practitioners are more sceptical of the benefits of CVAs, but rather have generally been less familiar with the process as a whole. This is partly because in England and Wales there is an individual voluntary arrangement process (that applies to individuals rather than companies) and much of the case law relating to these IVAs is applicable to CVAs. There is therefore a much greater familiarity on the part of insolvency practitioners across England and Wales with the voluntary arrangement process than would be the case in Scotland. The upfront costs of CVAs may have been viewed as a bar to using them for the rescue of smaller companies (the availability of funds to meet such costs in a distressed company being of paramount importance).Other simpler processes (a prepack administration or a liquidation and sale) might have been preferred in Scotland in low asset companies.
Would insolvency practitioners change CVAs if they could and how? Do you think there will be any changes to CVAs in the near future and are there lessons to be learned from other countries?
I suspect insolvency practitioners are reasonably comfortable with CVAs as they are currently regulated - not because they consider that the outcomes that are achieved are necessarily objectively fair for creditors - but rather because the flexibility of CVAs gives the insolvency practitioners a fairly blank canvas and thus allows them to be creative in what they propose in a CVA . I do think that the rules around calculation of voting rights for creditors (such as landlords) who have continuing contracts with the debtor company, will have to be reviewed.
I am not really able to say much by way lessons from other jurisdictions. It is often said that CVAs are similar to Chapter 11 insolvencies in the US. The main similarity I think is that both of those processes leave the existing management team in control of the business. By contrast, in administrations and liquidations, day to day control of the business is assumed by the administrator/liquidator. This "debtor in possession" element is often criticised by creditors because the management team that may be viewed as having caused the problems remain in place and often stand to benefit if a rescue can be achieved (which rescue of course will have come at a price to the creditors).
Looking ahead, do you think the use of CVAs will outstrip the use of other forms of rescue/restructuring packages? Are there any other sectors which you believe might be facing problems comparable to retail (e.g. construction, hotels and leisure) which might use CVAs?
No, I think that CVAs will continue to be used along with other insolvency processes and as noted above, I don't think it's right to state that CVAs are "outstripping" other processes. I think that all we are seeing is more press coverage of CVAs and their use in more high-profile businesses than previously. The reasons for the higher number of such high-profile businesses in retail and leisure using CVAs is not a function of something special about CVAs, but is rather a function of their being higher numbers of retailers and leisure operators being in distress - and that is itself a result of the state of the UK economy. Years of austerity and low wage growth squeezing disposable income in conjunction with challenges to the High Street (e.g. increased online activity).
CVAs can be used in any area. They are an effective way of reducing a balance sheet deficit in any industry sector. However, the recent high profile CVAs have been in those industries where there is a significant leasehold property portfolio. That is the reason why we have seen comparatively large numbers of retail and restaurants type CVAs.
What impact do you think a no-deal Brexit would have on the scale of UK insolvencies in general?
My own view is that a no-deal Brexit will increase the number of UK insolvencies as it will impact upon the turnover of many businesses. Certain businesses of course are necessarily more in the firing line than others (those who export to the EU being the most obviously example). Any business that suffers a significant downturn in turnover will undoubtedly face distress and, it is obvious to see that the more companies that are facing financial distress, the greater the number of insolvencies will be. But it is not just those companies that export that will be affected. The whole supply chain to those companies will have a knock-on impact and no doubt some of the businesses in the supply chain will likewise fail.
Is there anything you would like to add?
It is impossible to look at insolvency outwith the greater context of the legal, social and economic framework of the country. Any changes that are made to an insolvency process will impact upon stakeholders - strengthening the position of landlords and CVAs for example, may lead to an increase in liquidations, because CVAs cannot be approved. So the rights of landlords may not be prejudiced in a CVA, but it may end up with the landlord having no tenant whatsoever (if a liquidation occurs as a consequence of a CVA not being approved). On the other hand, the liquidation of a struggling business gives opportunities to competitors. Where the rights of landlords are prejudiced in a CVA, this necessarily impacts upon the value of those landlords themselves. And that in turn has an impact on the banks that have funded those landlords and has further "downstream" impacts - such as the value of pensions (given how heavily pension funds invest in property owning companies).
Any comment about the impact of the reintroduction of Crown preference in 2020 on CVAs and other insolvency processes?
CVAs - in a CVA it is not possible to compromise the claims of secured or preferential creditors without the express consent of those creditors. The proposed change will in effect convert a tranche of HMRC ordinary debt (that would have been capable of being compromised in a CVA like any other ordinary debt) into preferential debt (which cannot be compromised). The change will therefore mean that the company proposing the CVA will now have to satisfy that debt in full.
Other insolvency regimes - much of the commentary about this change has been around the issue of the extent to which it might discourage rescue finance being put into distressed companies. The analysis is like this - if a company is at risk of going into liquidation or administration, any party who may be considering providing funding to that company at that point will carry out an analysis of the likely return in the event of an insolvency. If it is not possible for that lender to take security from the borrower, then in an insolvency that creditor will rank equally with other unsecured lenders (i.e. behind preferential creditors). This change will enlarge the class of preferential claims and will thus automatically reduce the amount available to unsecured creditors. Given that even only a few months trading can cause a large increase in the amount owed to HMRC (e.g. a full VAT quarter) the concern is that providing funds to a company in distress may be viewed as even riskier than before because of the increase in the amount of preferential claims. That may therefore act as a deterrent to the provision of rescue finance.