Where your charity is currently:
- unable to pay its liabilities as they fall due or will be unable to do so in the near future, or
- has greater liabilities than assets; and
- the charity is set up as a Charitable Incorporated Organisation (CIO); and
- it will be able to get out of its current predicament if it had more time to do so, or it would be able to pay more of its debt back by carrying on than it would do if it closed now
then it is possible to seek to enter into a Company Voluntary Arrangement (CVA).
What is a CVA?
It is a legal contract between the Charity, its creditors and a Licensed Insolvency Practitioner. It allows the charity to continue and to be fully under the control of the trustees whilst removing the ability for any creditor to take action to damage or close down the charity.
The contract is called a proposal. The proposal sets out the current assets and liabilities of the charity, an explanation of what has led it to this position, details of why the CVA is better than liquidation, and confirmation of the financial proposal being offered.
Because it is a contract it provides the ability to completely restructure the organisation and can contain any terms you so desire, subject to them not being forbidden by the Insolvency Act.
What debts does it deal with?
It deals with all unsecured debts - e.g. landlords, HM Revenue & Customs, pension deficits, trade creditors, and employees’ claims.
In nearly all circumstances each creditor will be treated equally. There are some occasions where this need not apply – e.g. in relation to landlord’s or pension fund deficit claims – but these will be exceptional.
The only debts the CVA doesn’t deal with is secured creditors because their rights cannot be affected or varied by a CVA unless they consent.
What is the process?
There are 3 stages to the process:
- Preparation of Proposal
- Insolvency Practitioner’s report to court
- Meeting of creditors and members
Preparation of Proposal
The proposal will be prepared either by, or with significant input from, your chosen Licensed Insolvency Practitioner, such as Kevin Lucas here at Lucas Ross.
The proposal can take anything from a few weeks to several months to put together. Whether it is quick or slow depends on a number of factors, such as the availability and views of the board of trustees, the level of confirmed support required from critical stakeholders and funders, and the view of significant creditors.
One of the most difficult steps is balancing the interests of creditors and meeting the charitable objectives. In a CVA proposal for a profit making business it is easy for the company to focus on making profits, which will be used to contribute to its historic debt. However, in a charity the objective is not to make profit (surplus), if anything it is to not make a surplus because it would like to spend any surplus fulfilling its objectives.
The ethical and moral dilemmas of this balancing act together with using future surpluses to pay historic debt is something we know too well and our knowledge and experience of how other charities’ have dealt with this will help you.
Insolvency Practitioner’s Report to Court
During the process of a CVA, the Insolvency Practitioner is given 2 titles – Nominee and Supervisor. He/she is Nominee until the proposal is approved (more on this below).
As Nominee the Insolvency Practitioner must report to court on the charity’s CVA proposal. The report is an independent view on the proposal. It will conclude whether the proposal is fit for creditors to consider or not. If it is a date for the meetings of creditors and members will be set.
It is at these meetings where creditors and members vote on the proposal. The meetings will be 2-4 weeks from the report being completed. The Nominee will notify all creditors and members of the meetings unless it is agreed with you that you will do this (often because it may be more cost effective).
At this stage the CVA is not approved or in place, this will only happen after the meetings are held.
Meeting of Creditors and Members
Both creditors and members must vote upon the proposal.
Voting at the creditors meeting is based on the value of debt of only those voting, not the number of creditors. For example 3 creditors (A, B and C) with debts of £1,000, £20,000 and £50,000 respectively vote at the meeting. Creditors A and C say yes to the proposal, but B says no. The total debts of the creditors is £71,000; £51,000 vote yes, but £20,000 vote no. In percentage terms 71.9% say yes, but 28.1% say no.
To be approved 75% or more of creditors voting must say yes. Therefore in the example above the CVA would not be approved as only 71.9% of voting creditors said yes. If however B had said yes but A had said no, the CVA would have been approved because it would have been £70,000 of debts saying yes and only £1,000 saying no – importantly 98.6% of voting creditors said yes.
Members must achieve a majority of only >50%, not 75% like creditors. If the situation arises where the position at the creditors and members meeting differs, it is the decision of the creditors meeting that prevails. It is possible if creditors say yes and members say no for a disgruntled member to apply to court to have the CVA reversed. We have never seen this happen, so the possibility of this arising is very remote.
It is uncommon for creditors to attend these meetings, they usually vote using the proxy forms supplied. They normally appoint the Chairman of the meeting as their proxy holder.
The members and creditors meetings are held on the same day, one after the other.
Once the CVA is approved the charity continues in accordance with the terms of the proposal and the Nominee becomes Supervisor, ensuring you adhere to the terms of the proposal.
Please be aware the information above is a summarised version of the entire CVA process. For further details on the process, such as who has the right to vote at meetings, or for advice on whether a CVA is appropriate for you then please contact Kevin Lucas on 0330 128 9489.