CVAs and Self Employed Businesses

Last month I described administration and how it affected Leeds United. In order to save the club from liquidation* the administrator propsed a company voluntary arrangement (CVA). Under the proposal, the club would be sold back to a consortium led by the majority shareholder Kent Bates, and the sale proceeds (after deduction of the costs of administration) would be distributed to unsecured creditors.

These crecitors, totalling approximately £35 million would receive in the region of 1% of what they were owed or 1p in the £. The offer was subsequently raised to 8p in the £ with the possibility of an extra 30p in the £ should Leeds return to the Premiership within the next 10 years.
This clearly is a better offer than liquidation* where Leeds United would cease to be a league club and the return to creditors would be negligible if anything at all.

Q: What is a company voluntary arrangment (CVA)?
A: A CVA is an arrangement, approved by the court, in which the company has formally agreed terms with its creditors for the settlement of its debts. It can be proposed by an administrator (as in the case of Leeds United), by a liquidator* or the directors.

Q: Is the CVA legally binding ?
A: All creditors must receive a copy of the proposal and are entitled to vote either in person or by appointing someone to vote on their behalf. Votes are counted in cash value meaning the largest creditor has the largest vote and provided in excess of 75% (by debt value) of creditors in value vote in favour, it is legally binding on the rest irrespective of whether they voted against the propsal or did not vote at all.

Q: What happens when the CVA is approved?
A:Once the CVA has been approved the Nominee ceasees to act and a supervisor is appointed. This person must also be a licensed insolvency practitioner and is usually the same person who was appointed as a nominee. It is their duty to ensure that the company complies with its obligations under the CVA and that creditors receive their money. The term of the CVA often ranges from 3 to 60 months and once completed the company can return to normal trading with all previous liabilities discharged.
As we got to press HM Revenue & Customs have lodged a last minute legal challenge to the proposed buyback of Ken Bates. Mr Bates has warned that Leeds will go into liqudation* if his offer is not accepted. This would be the end of the club.
*Next month I will attempt to explain the merits and disadvantages of liquidation (hopefully not using Leeds United as an example).

McCambridge Duffy are a firm of leading chartered accountants and one of the largest insolvency practices in the U.K. We specialise in helping self employed individuals. Should your business be experiencing any financial difficulties call free on 0800 043 3328 where one of our highly experienced staff will be available to help you.