"(A) An enquiry into the factors that make for a successful Company Voluntary Arrangement ("CVA"); (B) those factors to be formulated mathematically; & (C) providing policy suggestions thereto".

An enquiry into the factors that make for a successful CVA, both as to acceptance & completion, so allowing stakeholders to plan, inc lenders to lend.

Further, what the repercussions occur for creditors & the business itself, in terms of return, for accepting or rejecting a CVA.

Those factors & returns to be formulated mathematically.

A consideration of where CVAs fit within insolvency theory.

A CVA is a debt reduction ‘agreement’, leaving management in control & ‘the company’ continuing. In liquidations & administrations, management lose control to a Licensed Insolvency Practitioner ("IP"). In liquidations, the company & business cease. In administrations the company ceases, but the business hopefully continues.

"The … company may make a proposal … to its creditors for a composition … of its debts … (… a “voluntary arrangement”)… A proposal … is one which provides for some person (“the nominee”) to act in relation to the voluntary arrangement, either as trustee or otherwise for the purpose of supervising its implementation; and the nominee must be … an [IP]… A meeting so summoned shall not approve any proposal … which affects the right of a secured creditor of the company to enforce his security [and] … any proposal under which … any preferential debt of the company is to be paid otherwise than in priority to such of its debts as are not preferential debts" ( Part 1 Insolvency Act 1986 ).

Why is a CVA study important?The problems are: (A) insolvent companies destroy wealth, thus improving CVA viability adds wealth; (B) UK policy promotes ‘turnaround culture' & CVAs, although underused, align with that policy &; (C) SMEs are more insolvency prone & CVAs are disproportionately SME utilised, but insolvency costs regressively affect SMEs - this is although policymakers assume that growth will come via SME contribution & thus as an insolvency option, CVAs appear to be both under-utilised & of greatest economic importance.

Cook (see below) state: “While the precise regime which governs CVAs is peculiar to Great Britain the results are of wider interest since they bear on the question of whether rehabilitation procedures play a useful role in an insolvency regime".

The search for a formula; can a successful CVA be ascertained beforehand by way of a formula? Such a formula would utilise variables, to ascertain the likelihood of CVA success – What are the respective returns to stakeholders, when faced with the choice for a CVA, as opposed to (say) liquidation? – Is the creditor return greater in a failed CVA (i.e. one that fails to compllete than had the company bypassed the CVA procedure & gone straight into (say) liquidation? - How do the above sub-questions affect different creditor classes, secured, preferential, employee, ongoing supplier, etc?

Stakeholders have no current proven methodology to evaluate a CVA; especially financiers, whose existing Z-scoring technique cannot accommodate an ‘insolvent company’. Corporate rehabilitation is a policy driver. Yet CVA take up is low: why? Asymmetric information & regressive insolvency frictional costs/transaction cost theory.

Comparative CVA analysis

Comparative CVA analysis

Comparative CVA analysis

What Are The Theoretical Basis Of Insolvency & Do CVAs Align With Theory? Some Theories:

✔ Agency Theory: explains the relationship between principals & agents in business.

❌ Asymmetric Information Theory: explains the relationship, whenever one party to an economic transaction possesses greater material knowledge than the other.

✔ Contract Theory: explains the way individuals & businesses construct & develop legal agreements. ❌& ✔ Regressive Frictional Costs Theory: explains regressive direct & indirect costs associated with the execution of financial transactions. ❌& ✔ Behavioural Economics Theory: explains the effects of psychological, social, cognitive, & emotional factors on the economic decisions of individuals & institutions & the consequences for market prices, returns, and resource allocation.

Comparative CVA analysis

What Is The Purpose Of An Insolvency Process & How Well Do Cvas Perform? Some Aims:

✔ To recycle assets with minimum cost?

✔✔ To maintain creditor original positions & rights?

✔ To protect viable businesses?

❌ To enforce moral hazard?

Past CVA business research consists of merely two papers - "The Preliminary Report to the Insolvency Service into Outcomes in Company Voluntary Arrangements" *(Walters & Frisby) (2006). ('Walters') “Formal Rehabilitation Procedures & Insolvent Firms: Empirical Evidence on the British Company Voluntary Arrangement Procedure" *(Cook, Pandit & Milman) (2001). (‘Cook’) No management &/or organisational theory, underpins this research. It's purely empirical.* The papers have been abbreviated to just one author for brevity.

CVA success, as defined by both Cook & Walters, is low, at only 21.9% & 27% this being 14% having passed through a CVA & 13% still subject to a CVA) respectively. Due to data insufficiencies, both papers acknowledge weakness in their ascertaining success; as both studies only looked at a snapshot in time & not a continuing linear analysis.

There is no data/research on the CVA creditor psychology. Walters state: “Without having access to the general proposals for the companies in the sample, it is difficult to draw any general conclusions as to how these are actually ‘sold‘ to creditors. It is also worth pointing out that there exists no consolidated data on those proposals that are rejected”.

Cook state:“CVAs are... concentrated among SMEs. Larger companies...prefer less disruptive & less costly out of court settlements”. This is supported by Walters, who state:“...there appears...bias towards...the CVA procedure for small companies”.

What doCook & Walters say?

Cook state: “CVAs come from a wide range of...sectors”.This view is supported by Walters. So any theoretical analysis can be extrapolated. Cook state: “…the major causes... leading to a... CVA are...varied [esp] although poor management...& poor general economic conditions...In the majority of cases, the reason for attempting to save the company...was that the company was fundamentally viable”. This statement is generic & offers no answers as to poor management improvement. Given the limited publicly available information, researchers were unable to perform pre-CVA corporate distress tests. Can my empirical data, contribute to the organisational theory of failure, or simply confirm SMEs have poor quality managers?

Cook state: “CVA performance is related to … size with the largest … achieving the best …”. This view is supported by Walters: “the subject of further research, is...whether...the survival of the company [is bettered]...when the company in question is large or medium sized”. Regressive frictional costs theory, economies of scale or just empiricism?

Cook state: “sector membership was …unrelated to CVA performance”. But Walters noted: “The category of ‘other business’ activities accounts for over 1/5 of the companies entering CVAs… [&] This [is a] rather elusive term” & was insufficient data upon which to build an adequate analysis. My proprietorial data ameliorates this concern, but does not build a theory basis.

Cook state: “CVAs pay higher mean dividends when secured creditors are absent...Firms are also more likely to survive when secured creditors are absent…secured creditors were supportive of CVAs [more] than unsecured preferential creditors…[&] we find that CVA performance is positively correlated with secured creditor support.” Is this data asymmetric information/agency/behavioural economic theory, applicable?

Both Cook & to a lesser extent, Walters conducted their research, prior to changes in legislation which minimised the power of secured creditors within the British insolvency regime & the rise of asset-based lenders. Whilst the previous literature is now redundant, is this asymmetric information/agency/behavioural economic theory applicable?

Cook state: “CVAs pay higher median dividends when unsecured preferential creditors are supportive”. It should be noted that Walters were unable to perform detailed HMRC CVA tests, but noted: “One preliminary point that should be made is that HMRC was a constant presence amongst unsecured creditors & often, the most significant creditor in terms of the amount owed by some distance…further research might throw some interesting light on [HMRC CVA] appraisal…unfortunately, it was not possible to estimate the proportion of unsecured debt that was due to HMRC”.

My access to proprietary data will so allow. There is researcher concern (see below) that HMRC is acting as an irrational economic actor/agent. Both Cook & to a far lesser extent, Walters used data from prior to changes in legislation which eradicated the preferential status of HMRC. Whilst the previous literature is now redundant, is asymmetric information/agency/behavioural economic/stakeholder theory applicable?

Cook state: “What could not be tested was the idea that greater risks would betaken in CVAs than in other types of insolvency regime & this must remain an item for future research”. Walters state: "...whether there is any follow-on procedure, &, if so, do creditors…recover any [further] dividends…”. The existence of further dividends from, say a liquidation, would affect the returns noted in both studies & I will so test. Such information is available through my proprietarydata & would impact asymmetric information/agency/behavioural economic theory.

Cook state: “Our research provides little evidence to support the view that banks are approaching CVAs in a negative fashion…A more pervasive problem is theforce of habit [in that banks have not actively sought to engage with CVAs”. It should be noted that whilst I tend to agree with the inertia sentiment of Cook, there appears to have been no research to validate the statement. Qualitative survey research need to be performed amongst financiers, who may not be acting as rational agents?

At its most basic, the dependent variable will be the success or failure of the CVA. At a more complex level, the dependent variable, will be creditor return. There will be a number of explanatory variables, including, but expanding on those Cook et al noted: debtor company sector coding; turnover gradations; gross asset value & net liability position; employee numbers, length of service, status, etc;insolvency causation; CVA rationale; HMRC; the position & types of secured creditor; tthe range of creditors & their involvement with the company; family support & guarantees, etc.

I will have the complete company files, with access to all creditor, supplier data, sales positions,management accounts, tax returns for all CVAs of a major SME CVA provider for the last 10 years. This information is not publicly available.

As to what is a successful CVA, the mere absolute financial return, should be contrasted with NPV return. Further, creditor return cannot be simplyanalysed in terms of creditor dividend return - as a trade supplier has an ongoing customer - an employee, an ongoing employment & HMRC - an ongoing tax payer. These 3 examples possess a non-dividend financial return, which can be quantified. As to unsuccessful CVAs, creditors may have received some dividends & indeed onward custom, employment, taxes, etc. Further, any post-unsuccessful CVA sale of the business, may not be a traditional fire-sale liquidation. Finally liquidation costs, may well be less, in a post unsuccessful CVA liquidation. These returns can be contrasted with the IP provided assumed return, when presenting the CVA v liquidation option. The returns are contrasted by way of an IP prepared ‘statement of affairs’, contrasting the ‘forced sale & ongoing business valuation’.

A major item, dictating creditor return are frictional costs, including, but not limited to IP costs. The statement of affairs (the Balance Sheet insolvency equivalent) is a gross statement, in that the statement does not make reference to net realisable asset values, i.e. post IP costs. Neither papers performed an in-depth analysis of CVA fees, nor compared & contrasted CVA fees with (say) liquidators fees: yet both note regressive CVA costs. This compare & contrast absence is understandable. If company XYZ enters into liquidation, then the company cannot also simultaneously be in a CVA. Consequently it is not possible to compare & contrast XYZ company CVA & liquidation costs.

Rehabilitation via a CVA v Liquidation; a quantitative cost analysis.

3 tests are possible.

First, a comparison in an unsuccessful CVA twixt envisaged CVA costs & subsequent liquidation costs.

Second, a comparison between two similar businesses, one which entered a CVA & one which was liquidated.

Third, by an analysis of fee time recording & considering what costs & to what extent such costs, would or would not have been occurred in the liquidation, as opposed to a CVA, & vice versa.

Finally, Z scoring will be utilised to identify what factors or variables, within any CVA, look to increase or decrease, frictional costs. It is submitted that the above tests could only be feasible, with access to proprietary data.

Neither papers sought qualitative non-IP stakeholders opinions. I will.

Firstly, rejected CVAs, on which there is no publicly available detailed record. Why was the CVA rejected?

Secondly, why do managers/owners seek (or not seek) a CVA. Walters consider that the “move towards the five year CVA may in fact be creditor [more especially HMRC, more especially by way of standard HMRC amendment] driven”. Walters express concern at this apparent extension of longevity: “... if the five year CVA is in fact the model [it is, it is submitted if there is HMRC major involvement] this may deter managers from opting for the procedure in the first place. Again, this is speculative, & the matter could usefully be investigated further, but well advised directors may find themselves with alternative strategies from which to choose, the obvious one being a prepack administration under which they themselves acquire the business…free from liabilities”. It is important to analyse stakeholder considerations. It is implicit within the Walters concerns, that in fact HMRC maybe ‘shooting itself in the foot by demanding longer CVAs’, with enormous government revenue loss. Irrational agency &/or proven behavioural economics theory?

Data analysis will be by: (A) reviewing proprietary data & (B) CVA stakeholders qualitative research survey. Given (A) I need to prove the proprietary data is representative of the whole CVA population. Representative means, is the: (1) KSA CVA population drawn from across the UK; & (2) population drawn from all sectors & sizes, etc. Representativeness proof is obtainable through comparing the KSA CVA population with both the general business population & the Walters & Cook CVA, populations.

I will repeat the binary legal outcome analysis success test, used by Walters & Cook, i.e. ‘is the company free from insolvency procedures’. Given the proprietary data, my analysis will not suffer from inherent weakness of publicly available information & will be able to consider the whole lifetime of my CVA, from inception to termination, whether that completion is a success or a failure.

I am repeating the Cook hypothesis testing, but on the proprietary data & altered to take account of Cook weaknesses –

“H1: CVAs among smaller firms are less likely to succeed than CVAs among larger firms” (p 261).

“H2: CVA success will not vary significantly according to industry sector” (p261).

“H3: An unsatisfactory CVA result is more likely when the major cause of financial difficulty is poor management” (p 261).

“H4: CVA success is more likely when the firm is fundamentally viable” (p 261).

“H5: CVA success is more likely when secured creditors do not exist” (p 262).

“H6: CVA success is more likely when secured creditors are supportive” (p 262).

“H7: CVA success is more likely when unsecured preferential creditors are supportive” (p 262).

“H8: Of secured & unsecured creditors (non-preferential & preferential), unsecured creditors will benefit most from CVAs than from alternative insolvency regimes” (p 262).

Cook was able to provide testable hypothesises. But given data limitations was unable to provide testable explanations and thereafter a theoretical underplay. It is hoped that the existence of proprietorial extensive information can ameliorate the above. Further that the creation of a Z – score formula, utilising proprietary data facts can create theories that can evolve into laws.

Acknowledged data weaknesses of previous papers.

Primarily conducted research on publicly available Companies House information, which is severely limited.

Was a snapshot of the above information at a single point in time and did not dynamically follow CVA progress.

Solution to the acknowledged weaknesses of previous papers.

KSA Ltd is perhaps the largest SME CVA provider and I have full access to all KSA internal CVA files, including rejected CVAs.

Cook hypothesises retested.

"H1: CVAs among smaller firms are less likely to succeed than CVAs among larger firms” (p 261)

Given the use of the proprietary data, which itself is based upon the SME population, which both Walters & Cook, have stated to be the mainstay of CVA utilisers, the hypothesis will change slightly to consider intra-SME success, i.e are smaller SMEs less likely to succeed than larger SME’s larger SMEs. My repeat of the study will however follow from inception to termination, each CVA; given proprietary data available & will not be a snapshot."

“H2: CVA success will not vary significantly according to industry sector” (p261).

However given SEC codes are often misleading & will be file review confirmed."

“H3: An unsatisfactory CVA result is more likely when the major cause of financial difficulty is poor management” (p 261).

This will be via by my research on the data & not solely via an IP questionnaire."

"H4: CVA success is more likely when the firm is fundamentally viable”.

“H5: CVA success is more likely when secured creditors do not exist” (p 262). As noted, the rights of secured creditors & the lending market (especially ABL use) have changed since both papers. I will therefore draw an ABL/traditional security distinction in this hypothesis testing, because I have the data to so do.

“H6: CVA success is more likely when secured creditors are supportive” (p 262). Again I will draw an hypothesis testing distinction between traditional secured lending & ABL lending.

“H7: CVA success is more likely when unsecured preferential creditors are supportive” (p 262).

Since Cook & to a lesser extent, the Walters report, HMRC preferential rights have changed. HMRC is very often a major SME creditor & is often the largest unsecured creditor. Cook et al comment negatively on HMRC CVA involvement (p 268). HMRC CVA policy now involves a CVA template & a rigid adherence to compliance. Given these factors, notwithstanding the loss of preferential status, it is still important to test this hypothesis as to HMRC. Cook & to a lesser extent, Walters proceeded on the basis that HMRC (for both VAT & National Insurance Contributions (“NIC”)) were the only preferential creditor of interest. However employees (& to the extent that they were subrogated by the NIC fund, ‘redundancy payment office ‘(“RPO”)) were & remain preferential creditors. So this hypothesis testing should have been bifurcated, between on the one hand HMRC/Customs & Excise & on the other hand, the RPO/employees. I will test three stakeholders, being HMRC, the RPO & employees. As to employee CVA attitudes,this will be considered qualitatively, later.

“H8: Of secured & unsecured creditors (non-preferential & preferential), unsecured creditors will benefit most from CVAs than from alternative insolvency regimes”.

This would appear to be counter to asymmetric information theory & rights-based stakeholder theory. What does 'success' mean for an unsecured creditor? Was this statement based upon just dividend return calculations or should it include onward custom?

TentativeFindings.

H1: "CVAs among smaller firms are less likely to succeed than CVAs among larger firms."

The correlation between size and success overlooks other factors. For instance, it may well be that secured lenders are more supportive of larger companies and therefore larger companies are more likely to succeed. The The existence of personal guarantees, more commonplace in smaller companies, may drive success.

H2: "CVA success will not vary significantly according to industry sector."

This still appears to be the case. However regulated & heavily capitalised sectors seem to have a moderately better chance of success, although the latter maybe due to secured creditor support.

H3: "An unsatisfactory CVA result is more likely when the major cause financial difficulty is poor management."

Poor management is a qualitative exercise, covering a range of managerial problems. At what point does a management failure become a non-management failure? Does the collapse of a major customer, indicate an act of God, or a failure to diversify sales? Cook relied on a general, but confidential IP opinion. A more systematic approach is needed. The specific reasons for failure maybe stated in the CVA documentation. These reasons are to be supported by director questionnaire. However preliminary resultsIndicate that were the CVA includes a strenuous management informationRequirement, management's

TentativeFindings.

"H4: CVA success is more likely when the firm is fundamentally viable”.

Initial results are proving problematic, as to the question of what is Micro/SME fundamental viability?"A theory of corporate insolvency": Addler: NYU Law Review: 1997. ⬇

TentativeFindings.

"H5: CVA success is more likely when secured creditors do not exist”.

Initial results indicate a possible cause & affect conflation. Secured creditors can overturn the CVA at any point & consequently, it is not the existence of secured creditors that determine CVA success, rather secured creditors enforce their security, when the CVA is about to fail. The type of security, also seems to affect outcome.

"H6: CVA success is more likely when secured creditors are supportive”.

Initial results indicate that this is a self-fulfilling thesis. Unless the secured creditors were initially supportive, the CVA does not go ahead in the first place.

TentativeFindings.

“H7: CVA success is more likely when unsecured preferential creditors are supportive”.

My data covers CVAs throughout the period when the nature of unsecured preferential creditors changed dramatically, so that now only employees & redundancy insurance ("RPO") are preferential creditors. Counterintuitively, initial indications are that these preferential creditors are indifferent & consequently support, or lack of it, is irrelevant.

“H8: Of secured & unsecured creditors (non-preferential & preferential), unsecured creditors will benefit most from CVAs than from alternative insolvency regimes”.

Initial indications strongly support this contention and even failed CVAs seem to benefit unsecured creditors.