After a few false dawns, it seems that the UK may now, at last, be getting to grips with the pandemic.
This is a time when viable businesses should be allowed, with the consent and support of their creditors, to reshape, continue profitable relationships, retain and recruit staff and generally keep the wheels of commerce turning.
However, a key tool that would enable companies to achieve this, the Company Voluntary Arrangement (CVA), has essentially become redundant due to government changes to insolvency law.
What is a Company Voluntary Arrangement?
CVAs are a consensual insolvency process. The directors of the company propose to its creditors a resolution of the financial difficulty in which it finds itself. This can take any shape but frequently involves the introduction of more equity, in return for which creditors agree to receive less than they are entitled to in full and final satisfaction of their claims.
If more than 75 percent by value of unsecured creditors agree to the proposal, it can bind the dissenting 25 percent. There are saving provisions for secured creditors (who cannot be affected without their consent), and preferential creditors (who must be paid in full before unsecured creditors receive anything, again unless they consent).
As a large majority of creditors need to approve a CVA, it is a useful consensual tool for companies.
Given many have found themselves in distressed situations through no fault of their own during the pandemic, it is reasonable to expect CVAs would be widely used as the economy emerges from Covid-19 restrictions and businesses grapple with changes brought by Brexit.
The return of Crown Preference
But a decision made by the HM Treasury in 2018 has effectively rendered CVAs impossible. In the October 2018 budget, it was announced that certain tax debts would be moved to preferential status (known as Crown Preference).
The government’s own calculations suggested this shift would increase recovery to the Treasury by £185mper year – a figure that pales into insignificance compared to the sums the government has paid in Covid-19 support packages.
However, this small change has been hugely consequential for CVAs. Its effects are exacerbated by the government’s decision to allow VAT payments to be deferred.
This means that if a hospitality company, for instance, wishes to propose a CVA, its proposal will need to include payment in full of all employer NICs and (potentially accumulated) VAT before unsecured creditors receive anything.
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