Bite-size Case Study

The company voluntary arrangement: Homebase

Published on August 31, 2020 Originally recorded 2019   12 min
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The Company Voluntary Arrangement or CVA. Here is an extract from the Insolvency Act, 1986, part 1, section 1. It could not be more prominent in the legislation. It shows its importance in the legislation. It deals with companies, the separate legal entities with limited liability. It asks the directors to make a proposal to rescue the company. The directors clearly guided by insolvency professionals, but it is the directors that are doing this, the directors who retain control. It is a proposal to its creditors. Those companies and individuals who are owed money, and these may be secured creditors, these may be unsecured creditors. The bottom line is insolvency being available to companies who cannot pay their bills as they fall due, it is very unlikely that a CVA will result in full repayment of those creditors. The language of the law here says, a composition in satisfaction of its debts, i.e, we are not going to get all your money back. This arrangement is to help the company and the business survive, and for you to be paid as much as possible, an acceptable level acceptable to you, and then we move on free of those legacy debts.
There are various routes to a CVA. First one is, you actually have to have an insolvent company, and that is those two definitions, the balance sheet test and the cash-flow test of insolvency. Only insolvent companies can get into these rescue mechanisms. A CVA can actually occur after an administration, an administration that we'll look at later on in this lecture. We've traded the company, now we're going to let the directors play out the rest of the life of the rescue in this mechanism. It can also be an exit from receivership, those statutory receivership, the legal receiverships where legal charges over property, but CVA can actually deal with the rest of the company that's not been secured. The whole idea here is that the future is negotiated. The future is an agreement between creditors, debtors overseen by a licensed insolvency professional so that the best outcome for the creditors is achieved.