Preliminary Report to the UK Insolvency Service into Outcomes in Company Voluntary Arrangements

Abstract

Corporate bankruptcy law in the UK offers distressed companies a range of formal rescue and restructuring procedures which seek to facilitate the continuation of the company and/or its business. One such procedure is the company voluntary arrangement (or CVA for short). A CVA is essentially a voting mechanism which allows a restructuring proposal to be brokered by the company with the assistance of a licensed insolvency practitioner and implemented if it is approved by the requisite majority of creditors. CVAs take two forms. The first is a "stand-alone" CVA which does not provide for a moratorium (stay) on creditors' claims in the period before the creditor vote. The second is a "CVA with moratorium" which provides for a pre-vote moratorium of up to 28 days. However, the CVA with moratorium is only available to small companies which satisfy defined eligibility criteria.

Proposals to introduce a "CVA with moratorium" model accessible by all companies were consulted on by government during 2009 and 2010. UK bankruptcy policy is therefore drifting towards the idea that a moratorium may be needed, more often than not, to facilitate the approval and implementation of otherwise viable restructuring proposals. Yet there is very little empirical evidence as to how the existing CVA procedures are working and whether they generate successful outcomes.

This paper (which takes the form of a report commissioned by government) contains the results of a preliminary investigation of CVA outcomes under the existing law. It seeks to provide a basic foundation for further hypothesis formation, research and policy evaluation. Our dataset consists of all 547 CVAs recorded as commencing in 2006 in England and Wales the raw data deriving from mandatory filings at Companies House, the UK companies registry. Having identified thirteen different outcomes in the entire population, we analyse a sample of 177 CVAs (32.4%) stratified according to the outcomes observed in the population to produce a range of descriptive statistics.

With some notable exceptions - such as the restructuring of the English Federal Mogul/T&N group companies - CVA usage is dominated by small companies. This of itself is not surprising bearing in mind that the vast majority of "live" company registrations in the UK consists of small companies. However, despite high levels of eligibility, we find that barely any of these companies use the small company "CVA with moratiorium" procedure. Chief among our other findings is that the "stand-alone" CVA appears to be used relatively successfully in some cases as a substitute for a winding-up procedure rather than as a restructuring mechanism. We also detect some possible abuse at the margins in that companies which have failed to comply with the terms of the restructuring are able to exit from the CVA straight to a dissolution, thus enabling their directors to escape scrutiny under our wrongful trading and director disqualification legislation.

Keywords: corporate bankruptcy, corporate restructuring, outcomes of bankruptcy procedures, UK

JEL Classification: G33, K22