CVA Seminar: Powerful Restructuring Tool for Business Recovery

A Lifeline for Business
KSA Group
Company Voluntary Arrangement
CVAs in Action
Aldermore
28th
November 2012

CVA Seminar Agenda
• What are Company Voluntary Arrangements?
– How do we use this 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

The Statistics Don’t Lie!

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!

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 about HMRC?
• 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

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?
• Bank’s cost of capital

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
• 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?

CVA Seminar: Powerful Restructuring Tool for Business Recovery

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