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When arts organisations are teetering on the brink of insolvency, a Company Voluntary Arrangement may throw them a lifeline. Mahmood Reza explains how.

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Over the last three decades that I have been involved with the creative sector, as an advisor and trustee, I have seen an increase in the level of financial risk that arts organisations are exposed to, and how they deal with those risks and accumulating debts. The reasons for the increase are well documented, including significant cost pressures, a change in government funding philosophy, attempts to overlay a version of the US model, increased competition for scarcer funds, a noticeable increase in the level of loan (risk) capital (sometimes referred to as social investment), and capacity and resource constraints.

An unfortunate consequence of these factors is that arts organisations are incurring greater levels of debt which are becoming more unsustainable, and put a question mark over their viability. To counter this, arts organisations should have an embedded proactive risk management strategy. A successful risk management strategy needs to identify, estimate and evaluate risk, and it needs to be kept up to date. Management and financial control, as in all circumstances, is essential. Robust and regular cash flow forecasting, management reporting, performance assessment, record keeping, costing and credit control are some of the main aspects.

Insolvency can occur when the company does not pay its debts when they fall due for payment, for example not paying the tax deductions from employees for PAYE and NIC across to the Inland Revenue on the 19th of the month following the month they were deducted; paying trade creditors well after the due date of settlement; and having insufficient cash to pay its liabilities on time. It is vital that the board of trustees takes action to address its insolvent position and acts to maximise creditors’ interests. At the point where closure appears inevitable, Company Voluntary Arrangements (CVAs) can provide a way for arts organisations to reduce their debt burden without having to go down the liquidation route.

A CVA is an arrangement between a company and its unsecured creditors to repay them either from future surpluses, liquidated assets or a combination of both. The offer needs to be Fit, Fair and Feasible to all concerned, and the deal is based on preserving the company, rebuilding income streams and surpluses and paying something back over an agreed time period, typically five years. Trustees maintain control, personal guarantees (typically provided to the banks) aren’t usually called in, and this presents an opportunity for the organisation to survive.

A CVA may be proposed by the trustees, but only if a company is insolvent or contingently insolvent. The actual CVA has to be set up by an insolvency practitioner, who is referred to as the ‘nominee’. Under the direction and help of the nominee, the trustees put together a proposal to the company’s creditors. The nominee can make an application to the court for a 28 day ‘moratorium’. This stops any court action being taken against the company whilst the proposal is put together. If the nominee applies for a moratorium, formal notice must be given to the Registrar of Companies at Companies House.

The nominee sends the CVA proposal to the company’s creditors and arranges a formal meeting called a ‘creditors’ meeting. The nominee must give the creditors at least 14 days notice of this meeting. At the meeting, the creditors will vote on whether or not they accept the CVA. It is not necessary for creditors to actually attend the meeting; their votes can be sent in writing or by email. Each creditor is given a vote based on how much money they are owed. Therefore, the company’s largest creditors have the most influence over the outcome of the vote. For example, a creditor who is owed 10% of the company’s total debt holds 10% of the vote. In order for the CVA proposal to be accepted, at least 75% of the votes must agree to its terms. If it is agreed, all of the company’s creditors are bound by the terms and conditions of the proposal, even if they voted against it, and the company does not need to pay PAYE, National Insurance or VAT in the CVA production period.

CVAs are not without pain as they can override normal contractual obligations and employment legislation. Creditors get an amount in the pound (less than they are owed), but there is always a risk that they will not get paid. If the terms of the CVA are not complied with, then all bets are off and creditors can pursue full recovery, albeit it is unlikely that the company will have any money left to pay them. A CVA does not affect the rights of secured creditors or landlords. They could still take possession action for any outstanding arrears.

If employees walk out while the CVA is being produced they will lose any employment rights and will not receive any redundancy pay or lieu of notice payments from the company. Additionally they will not be eligible (generally) for unemployment/job seekers benefit. Once a CVA is agreed the company will be subject to normal employment law and must make any relevant redundancy payments. Employee claims can be made through the Redundancy Payments office for Wages, Redundancy, Notice and Holiday pay. A key aim of a CVA is often to retain jobs, but if some posts do need to go and there were more than 20 employees before the CVA was proposed, negotiations should be entered into with staff and agreement should be made with Trade Unions or staff representative as to how staff are to be selected.

Mahmood Reza is Proprietor of Pro Active Resolutions.
www.proactiveresolutions.com
T: 0116 224 7122
E: arts@proactiveresolutions.com

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