CVA of an Industrial and Provident Society

Thanks to a change in the law in 2014 it is possible for an Industrial and Provident Society to now access the rescue procedure of a Company Voluntary Arrangement.

Where your Industrial and Provident Society (IPS) is currently:

  • unable to pay its debts as they fall due or will be unable to do so in the near future, or
  • has greater liabilities than assets; 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?

A CVA is a legal contract between the Industrial and Provident Society, its creditors and a Licensed Insolvency Practitioner. It allows the IPS to continue and to be fully under the control of the management committee whilst removing the ability for any creditor to take action to damage or close down the IPS.

The contract is called a proposal. The CVA proposal sets out the current assets and liabilities of the Industrial and Provident Society, an explanation of what has led it to this position, details of why the Company Voluntary Arrangement is better for all stakeholders than liquidation, and confirmation of the financial proposal being offered.

Because the proposal is a contract it allows the IPS to completely restructure its affairs if needed and can contain a wide variety of terms and conditions, providing they are not forbidden by the Insolvency Act.

What debts does it deal with?

The Company Voluntary Arrangement deals with all unsecured debts - e.g. landlords, employees’ claims, HM Revenue & Customs, and suppliers.

In nearly all circumstances each creditor will be treated equally. There are some occasions where this need not apply – e.g. in relation to the claims of landlords or pension fund deficits – but these will be exceptional.

The only debts the CVA is unable to deal with without the relevant creditor’s consent deal are debts that are secured against assets or items owned or held by the IPS.

What is the process?

There are 3 stages to the process of obtaining a Company Voluntary Arrangement:

  1. Preparation of Proposal
  2. Insolvency Practitioner’s report to court
  3. Meeting of creditors and members

Preparation of Proposal

Your CVA proposal will be prepared either by, or with significant input from, your chosen Licensed Insolvency Practitioner.

Preparing 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 management committee, the level of confirmed support required from critical stakeholders and funders, and the views of significant creditors.

The financial proposal will often be based upon either continued trading or the sale of one or more key assets to provide a one off payment to creditors. Unlike a profit making business which will use its future profits from trading its customers to contribute to paying its historic debt, the IPS will be fairly reliant on the continued support of its users or members to generate this surplus. CVA’s for Industrial and Provident Societies are therefore likely to be rare.

The management committee will face many ethical and moral dilemmas about what to do currently and/or how to generate the financial return required. However, we know very well how similar organisations have dealt with this and we will share our knowledge and experience of this to 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 IPS’s CVA proposal. The report is an independent view on the CVA proposal itself. 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 the 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 (for example, because it may be more cost effective).

At this stage the Company Voluntary Arrangement is neither approved nor 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, it is not based on the number of creditors voting. 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 voting 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, £70,000 of debts would have said yes and only £1,000 said no. The CVA would have been approved because 98.6% of voting creditors said yes. It is incredible how the outcome can change depending on which creditors vote yes or no.

The members meeting 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.

It is uncommon for creditors to attend the meeting, they usually vote using the proxy forms supplied. They normally appoint the Chairman of the meeting as their proxy holder. The Chairman of the meeting will be someone from the Insolvency Practitioner’s office.

The members and creditors meetings are held on the same day, one after the other.

Once the CVA is approved the IPS 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 Company Voluntary Arrangement 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 928 1489.