30/04/2018. CVAs WHY DO ONE? ALL NEW ADDITIONAL WEBCASTS UPDATES AND SUMMARIES OF KEY AREAS OF INSOLVENCY LAW AND PRACTICE

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1 ALL NEW ADDITIONAL WEBCASTS UPDATES AND SUMMARIES OF KEY AREAS OF INSOLVENCY LAW AND PRACTICE CVAs WHY DO ONE? A LOOK AT THE REASONING BEHIND ENTERING INTO A CVA, WHY THEY ARE POPULAR AT THE MINUTE AND WHY MANY OF THEM INEVITABLY FAIL LAW PRACTICAL RISK 1

2 WHAT IS A CVA? UNDER A COMPANY VOLUNTARY ARRANGEMENT, TRADING CONTINUES AND A REPAYMENT SCHEME IS AGREED WITH CREDITORS. A CVA, WHICH IS LEGALLY BINDING, AIMS TO ALLOW THE BUSINESS TO SURVIVE AS A GOING CONCERN, OR ACHIEVE BETTER REALISATION OF THE COMPANY'S ASSETS PRACTICAL: THIS WILL REQUIRE THE DIRECTORS TO WANT TO AND BE ABLE TO RESCUE THE BUSINESS. THIS WILL BE BY VIRTUE OF THE COMPANY MAKING PROFITS GOING FORWARD AND / OR MAKING COST SAVINGS [IN MOST INSTANCES] RISK: A CVA IS NOT THE RIGHT OPTION AND YOU HAVE WASTED CREDITORS TIME AND MONEY IT IS LIKELY THAT IF THE CVA DOESN T WORK YOU WILL END UP IN ADMINISTRATION OR LIQUIDATION ANYWAY WHY ARE CVAs NOT USED? IN Q THERE WERE AN ESTIMATED 300 ADMINISTRATIONS, 4.7% LOWER THAN IN Q AND 14.2% LOWER THAN THE SAME PERIOD IN 2016, BUT ON A FAIRLY STABLE TREND SINCE THERE WERE AN ESTIMATED 56 COMPANY VOLUNTARY ARRANGEMENTS (CVAS) IN Q4 2017, 24.3% LOWER THAN THE PREVIOUS QUARTER AND 31.7% LOWER THAN Q4 2016, AND FOLLOWING A RELATIVELY STABLE TREND. THERE WERE AN ESTIMATED 4,027 INSOLVENT COMPANY LIQUIDATIONS IN THIS Q4 2017, COMPRISING 3,414 CREDITORS VOLUNTARY LIQUIDATIONS (CVLS, 85% OF TOTAL INSOLVENT COMPANY LIQUIDATIONS) AND 613 COMPULSORY LIQUIDATIONS (15% OF TOTAL INSOLVENT COMPANY LIQUIDATIONS). BECOMING MORE POPULAR? BHS TOYS R US TRAVELODGE BYRON BURGERS JAMIE S ITALIAN NOT REALLY IF YOU GO BACK FURTHER THEY HAVE ALWAYS BEEN POPULAR IN THE RETAIL SECTOR 2

3 WHY DO CVAs STRUGGLE? TOO MUCH FOCUS ON AREAS OF WEAKNESS AND PARTS OF THE BUSINESS THAT NEED TO BE ABANDONED MANAGEMENT FAIL TO SEE THE LARGER THREATS TO THE OVERALL BUSINESS SUPERVISOR TAKES A BACK SEAT AND HAS VERY LITTLE INPUT ALLOWING THE MANAGEMENT WITH FREE REIGN TO MAKE CUTS AS THEY SEE FIT THESE CUTS, MORE OFTEN THAN NOT, ARE NOT SEVERE ENOUGH TO HAVE AN IMPACT CHANGES ARE OFTEN JUST MADE TO MAKE A CVA VIABLE OR TO GET IT VOTED THROUGH TO SAVE THE COMPANY WITHOUT REALLY TRYING TO GET TO THE BOTTOM OF THE ISSUES WHY DO CVAs STRUGGLE? MOST CVA S DO LITTLE TO ADDRESS POST ACCEPTANCE OPERATIONAL ISSUES FACING THE BUSINESS, SUCH AS MERCHANDISING, MARKETING AND MOST IMPORTANTLY CUSTOMER CONFIDENCE. VERY LITTLE WORK IS CARRIED OUT TO ASSESS THE IMPACT OF THE CVA THE FACT THAT CUSTOMERS, SUPPLIERS, LANDLORDS ARE DEALING WITH A COMPANY THAT HAVE LET THEM DOWN BEING ABLE TO ACCURATELY ASSESS AND THEN COMPLY WITH PAYING AN EXACT AMOUNT EVERY MONTH IS VERY DIFFICULT SO, WHY DO A CVA? 3

4 1. CONTINUE TRADING A CVA ALLOWS A COMPANY TO CONTINUE TRADING EVEN IF A CREDITOR HAS PETITIONED FOR THE WINDING-UP OF THE COMPANY, A BUSINESS RESCUE SPECIALIST CAN PETITION THE COURT TO ADJOURN THE HEARING TO ENABLE THE COMPANY TO PURSUE THE CVA THROUGHOUT THE FILING AND ONTO THE CREDITORS DECISION. BANK ACCOUNTS ARE FROZEN UPON THE ADVERTISEMENT OF A WINDING-UP PETITION, THE ADJOURNMENT CAN ALSO HELP TO OBTAIN A VALIDATION ORDER SO THAT BANKS CAN REOPEN BANK ACCOUNTS AND BUSINESS CAN CONTINUE. 2. MAINTAINING CONTROL & INVESTIGATIONS A CVA CAN ALLOW THE DIRECTORS / OWNERS TO CONTINUE TRADING, WHILST MAINTAIN CONTROL OF THE COMPANY. THERE WILL BE NO INVESTIGATION INTO THEIR CONDUCT UNDER A CVA (AND NO FORMAL REPORTING VIA D-RETURNS), SO THEY ARE FREE TO CONTINUE TO TRADE. ALSO, S.238, S.239 AND S.245 IA 1986 ARE NOT AVAILABLE. OTHER RECOVERIES ARE NOT AVAILABLE EITHER SUCH AS 212, 213, 214. [NOTE: THAT ANY TRANSACTIONS BETTER PURSUED IN LIQUIDATION WOULD NEED TO BE DISCLOSED] THE DIRECTORS INPUT CAN BE CAN BE CRUCIAL IN MANY SPECIALISED INDUSTRIES, BECAUSE NO-ONE KNOWS THEIR BUSINESS BETTER THAN THEM. THE FACT THEY ARE NOT INVESTIGATED IS A USEFUL INCENTIVE. 3. FREEZING / DEFERMENT OF DEBT TO HMRC FOR A DEFINED PERIOD OF TIME HMRC PAYMENTS CAN BE FROZEN UNTIL THE POINT WHEN THE CVA IS AGREED. 4

5 4. FIXED TIME AND ASSET PARAMETERS ONCE THE CVA PROCESS BEGINS, EVERYTHING HAPPENS WITHIN A PREDEFINED PERIOD OF TIME. FOR EXAMPLE, THE ARRANGEMENT WILL USUALLY BE A 3 TO 5 YEARS REPAYMENT PLAN, BASED UPON A FINANCIAL FORECAST. THE DIRECTORS KNOW HOW MUCH NEEDS TO BE REPAID AND WITHIN WHAT TIME CONSTRAINTS. HUMAN BEINGS DEAL MUCH BETTER WITH CERTAINTY AND PROCESS, THAN UNCERTAINTY. 5. TAXATION ADVANTAGES WHERE A COMPANY ENTERING INTO A CVA HAS ACCUMULATED TRADING LOSSES FOR TAX PURPOSES, THE CONTINUED AVAILABILITY OF SUCH LOSSES IN FUTURE PERIODS IS LIKELY TO BE CRUCIAL TO THE SUCCESSFUL IMPLEMENTATION OF THE ARRANGEMENT. ASSUMING THE COMPANY CONTINUES TO TRADE THROUGHOUT THE CVA PROCESS, ITS UNRELIEVED TRADING LOSSES MAY BE CARRIED FORWARD FOR OFFSET AGAINST FUTURE PROFITS ARISING FROM THE SAME TRADE. ALSO CAPITAL GAINS ON ASSET DISPOSALS MAY BE SET OFF AGAINST LOSSES. 6. REDUCTION OF DEBT THE POINT OF A CVA FROM A COMPANY S PERSPECTIVE IS THAT IT FACILITATES TRADE, SO REDUCING DEBT. THE CVA IS CHEAPER TO EFFECT AND ULTIMATELY THE CREDITORS WILL AGREE TO ACCEPT LESS PENCE IN THE POUND FOR WHAT IS OWING TO THEM BUT IT OFFERS THEM A BETTER RETURN THAN CVL OR WUC WHERE THEY WOULD LIKELY GET NOTHING. ALSO SUPPLIERS MAY NEED THE BUSINESS AS MUCH AS THE COMPANY NEEDS SUPPLIES. 5

6 7. BUSINESS CAN BE RESTRUCTURED A CVA BUYS THE COMPANY TIME TO RESTRUCTURE THE BUSINESS WITH A VIEW TO POTENTIAL FUTURE PROFITS. DIRECTORS HAVE SOME BREATHING SPACE TO FORMULATE A VIABLE PLAN FOR THE POSSIBLE RESCUE OF THE BUSINESS. THIS COULD MAKE IT MORE ATTRACTIVE TO INVESTORS OR SUPPLIERS AND OTHER CREDITORS. MORE ON THIS LATER! 8. INCREASING CONFIDENCE THE IMPROVED CASHFLOW, BUSINESS PLAN AND REDUCTION COSTS MAY INCREASE SUPPLIER AND CREDITOR CONFIDENCE IN THE BUSINESS. AS LONG AS THE HISTORY OF THE BUSINESS IS SOUND CREDITORS MAY BE MORE LIKELY TO BE PERSUADED. 9. PUBLICITY THERE IS LESS PUBLICITY WHEN ENTERING INTO A CVA. THERE A RE PUBLIC NOTIFICATIONS OF AN ADMINISTRATION AND LIQUIDATION. A CVA CAN OFTEN GO UNDER THE RADAR TO THE OUTSIDE WORLD WHO ARE NOT PARTY TO THE CVA. 6

7 10. FLEXIBLE THE COMPANY RETAINS CONTROL OF ASSETS AND CHOOSES WHICH ONES ARE BEST TO OFFER UP IN A CVA. IT IS LIKELY NO ASSET WILL BE OFFERED UP AS THEY ARE NEEDED TO TRADE HOWEVER THERE IS STILL THE FLEXIBILITY AVAILABLE, WHEREAS THE DECISION MAKING IS TAKEN AWAY FROM THE COMPANY IN AN ADMIN. 11. BUSINESS RATES - KAYE VS OXFORDSHIRE DISTRICT COUNCIL A DECISION OF THE HIGH COURT IN KAYE V SOUTH OXFORDSHIRE DISTRICT COUNCIL AND ANOTHER [2013] EWHC 4165 (CH) HELD THAT A COMPANY'S ENTIRE ANNUAL LIABILITY FOR NON-DOMESTIC PROPERTY RATES COULD BE CONSIDERED A CONTINGENT DEBT WHERE THAT COMPANY WENT INTO A CVA PART WAY THROUGH THE RATEABLE YEAR. THIS WAS A DESPITE THE RATEPAYER HAVING A STATUTORY ENTITLEMENT TO PAY THE RATES BY INSTALMENT. THE INSOLVENCY SERVICE UPDATED ITS TECHNICAL MANUAL IN JANUARY 2014, SO THAT THE ENTIRE UNPAID AMOUNT OF COUNCIL TAX FOR THE YEAR IN WHICH THE BANKRUPTCY ORDER IS MADE WILL BE A PROVABLE DEBT IN THE BANKRUPTCY. I ALSO NOTE THAT THE INSOLVENCY SERVICE HAS ISSUED A NOTE TO OFFICIAL RECEIVERS ADVISING THEM THAT ALL OUTSTANDING LIABILITIES FOR COUNCIL TAX AND NON-DOMESTIC (BUSINESS) RATES FOR THE YEAR IN WHICH THE INSOLVENCY COMMENCES ARE PROVABLE DEBTS AND THAT THIS APPLIES WHETHER OR NOT THE COMPANY OR BANKRUPT WAS IN ARREARS AT THE DATE OF INSOLVENCY. 11. BUSINESS RATES - KAYE VS OXFORDSHIRE DISTRICT COUNCIL THE DECISION ESSENTIALLY MEANS THE FIRST YEAR OF THE CVA YOU COULD MAKE A SIGNIFICANT SAVING ON BUSINESS RATES UP UNTIL THE END OF THE TAX YEAR [CANNOT SEE THAT THIS HAS BEEN OVERTURNED AND AM KEEN TO KNOW IF THIS WAS EXPLOITED IN THE RECENT HIGH PROFILE CVAs] 7

8 IS THE CVA VIABLE? INVESTIGATIONS PRE-APPOINTMENT SUPPORT OF KEY PLAYERS SUPPORT OF THE BANK / CHARGEHOLDER S E E E L U F C L STOCKS / SUPPLIERS EMPLOYEES EQUIPMENT ENVIRONMENT / H&S LEASES / LANDLORDS UTILITIES FUNDING CUSTOMERS LEGAL / LICENCES A SECURED CREDITOR CANNOT BE BOUND BY THE TERMS OF A CVA THEY MUST SIT OUTSIDE THE ARRANGEMENT. WILL THEY CONTINUE TO SUPPORT DURING CVA TERM? WILL THEY CONTINUE TO OPERATE FACILITY?... LOANS, OVERDRAFT ETC. EALRY NEGOTIATIONS ARE VITAL. WHAT IS THE RELATIONSHIP? THE SUPPORT WILL NEED TO CONTINUE THROUGHOUT WORTH NOTING THAT QFC COULD APPOINT ADM, AR ETC POST APPOINTMENT IS THE CVA VIABLE?... IT IS IN FINANCIAL DIFFICULTY SO WHAT IS GOING TO CHANGE? RESTRUCTURE Company voluntary arrangements can terminate contracts Employment Leases Onerous supply contracts Terminate property lease obligations and vacate premises instruct a lawyer to help with surrender of the lease ideal for closure of unprofitable parts of the business Terminate onerous customer/supplier contracts useful for contracts with warranties, after sales service etc Terminate employee contracts with the liabilities being paid by the RPS Restructure management team by making redundancies useful for management / director disputes. Restructure intercompany or directors debts write off loans, defer claims to make CVA attractive Restructure funding strategy restructure bank debt, factor debts, alternative funders? Possible hive down of business to Newco to enable trade with customers and suppliers and management charge paid to Oldco to fund CVA. THE POSSIBLE FALL OUT AND COST / CLAIMS FROM THIS WILL RANK AS UNSECURED AND FALL WITHIN THE CVA. 8

9 IS THE CVA VIABLE?... ARE THERE ANY KEY CREDITORS TO WHOM THE CVA WOULD DEPEND ON? MAJOR CREDITORS? DOES ANYONE HOLD MORE THAN 25%? HMRC? MAJOR SUPPLIER? WILL THEY SUPPORT AND VOTE FOR THE CVA? NEGOTIATE EARLY IS THERE A CREDITOR IN THE CVA WHO IS VITAL TO THE SURVIVAL OF THE BUSINESS? A UNIQUE SUPPLIER OF GOODS WILL THEY NEED TO BE PAID PRE-APPOINTMENT? RISKY!!! WILL THEY NEED TO BE TREATED AS A KEY CREDITOR IN THE CVA? HOW CAN THIS BE DRAFTED? IS THE CVA VIABLE?... ARE THERE ANY KEY CREDITORS TO WHOM THE CVA WOULD DEPEND ON? BE VERY CAREFUL WITH KEY CREDITORS THERE IS A FINE LINE BETWEEN GIVING SOMEONE BENEFICIAL TREATMENT AS A KEY CREDITOR AND UNFAIRLY PREJUDICING OTHER CREDITORS IT IS AN OLD CASE BUT A CRACKER AND A BRILLAINT REMINDER OF THE ABOVE KEY CREDITORS, PREFERENTIAL TREATMENT, LANDLORDS, UNFAIR PREJUDICE HOW NOT TO DO IT! MISS SIXTY MOURANT & CO TRUSTEES LTD AND ANOTHER VS SIXTY UK LIMITED 9

10 Background In November 2006 the landlords ("the Liverpool Landlords") let two units to Miss Sixty UK Ltd for a term of ten years. The company's Italian parent company, Sixty SpA, guaranteed rent under the leases. The company ran into difficulties and tried to surrender the leases but the Liverpool landlords would not accept the surrenders. Administrators were appointed on 29 September 2008 and a CVA was proposed. Sixty SpA agreed to contribute 300,000 towards the claims of the landlords, being the sum they would have paid the landlords had the landlords accepted the surrenders of the leases. The proposal provided for Sixty SpA to be released from all liability under the guarantees it had given upon payment of the 300,000 sum to the Liverpool Landlords. The proposal was passed and the Liverpool Landlords sought to challenge the CVA under section 6(1) of the Insolvency Act 1986 ("the Act") by arguing, in particular, that the proposal left them in a substantially worse position than they would have been in on an insolvent liquidation and that the proposal made unrealistic assumptions based on new money Sixty SpA was willing to make available In times of commercial and financial turmoil, the ability to enforce the terms of the existing leases against the guarantor.was a most valuable right, and there was no sufficient justification for requiring any of the guaranteed landlords (let alone just one of them) to accept a sum of money in lieu.to adopt such a procedure, in circumstances where the solvency of the guarantor is not in issue, is to undermine the basic commercial function of the guarantee, and to force the landlord to accept a commercially inferior substitute for it. 10

11 WHAT ARE THE ISSUES? The issue for the court was whether the prejudice suffered of putting the Liverpool Landlords in a less advantageous position constituted an unfair prejudice. The High Court recognised that differential treatment does not automatically make a CVA unfairly prejudicial and noted that the mere difficulty of assessing a fair compensatory sum should not mean that landlords must accept any sum. That would undermine the commercial function of a guarantee and leave them in a worse position than if the company had gone into insolvent liquidation. THE COURT S DECISION The court ruled that it was unfair for the Liverpool Landlords' guarantees to be stripped in return for compensation where that compensation had been artificially calculated. Further, the Liverpool Landlords' position was prejudiced by the fact that the company and administrators knew the CVA would be approved as other unsecured creditors were to be paid in full. On the facts, there was no justification in this case for the differential treatment of the Liverpool Landlords. As a result the court quashed the CVA. The judge also directed criticism at the administrators and noted the importance of maintaining independence where a CVA could be carried by creditors whose position would be unaffected by the proposal, or even improved. 11

12 SO WHY DID MISS SIXTY GO THIS FAR? the objections by Mourant & Co Trustees were effectively swamped by the votes of the other creditors who stood to lose nothing from the CVA. As a result, and as noted by the judge, Mourant & Co Trustees had..to embark on lengthy and expensive proceedings to set it aside, which would itself buy time and subject the applicants to all the uncertainties of litigation. THE JUDGE CONCLUDED THAT this is.a CVA that should never have seen the light of day and tenants should take note of the likely outcome if CVAs are structured to overlook the interests of landlords in such an unreasonable way WHY WOULD I DO A CVA WHEN I CAN PRE- PACK AND BUY THE ASSETS BACK ON THE CHEAP? BUT ISN T A PRE-PACK BETTER? I CAN BUY THE ASSETS BACK FROM THE ADMINISTRATOR (CHEAPLY) I WON T HAVE TO SLOG AWAY PAYING CONTRIBUTIONS FOR 5 YEARS WITH THE RISK OF LIQUIDATION HANGING OVER MY HEAD PRE-PACKS CONTROL NO GUARANTEE YOU WILL BE ABLE TO BUY YOUR BUSINESS BACK SIP 16 PLACES EXTRA EMPHASIS ON MARKETING ADMINISTRATOR HAS TO ACT ON BEHALF OF CREDITORS MUST ACHIEVE THE BEST PRICE ACTS INDEPENDENTLY (THINK VE VEGAS CASE) D-RETURNS AND INVESTIGATIONS 12

13 SO HOW CAN I ASSESS WHETHER A CVA COULD BE THE RIGHT OPTION? What information should you give them about the options? D-Return CVA ADM Antecedent Transactions CVA ADM Lose Control CVA ADM Sale of Biz CVA ADM Moratorium CVA ADM Most Costly CVA ADM 13

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