On 12 December 2017, creditors in the long running special administration of failed stockbroking firm, MF Global UK Limited (“MF Global”), approved a company voluntary arrangement (“CVA”). This case demonstrates the flexibility of the CVA procedure and the role it can play in complex financial services cases.
What is a CVA?
A CVA is a statutory tool which can be used by a debtor company to compromise creditors’ claims or to give effect to some other restructuring of its affairs. The process involves the company making a proposal to its creditors and shareholders, for them to vote on. If the requisite majorities of creditors and shareholders approve the proposal, it binds all of the company’s creditors, irrespective of whether they voted for it, subject to some exceptions and a creditor’s right to challenge the CVA. Non-insolvency experts can click here for more explanation of the CVA process.
CVAs have received most publicity when used to restructure the lease liabilities of high profile retail groups, with mixed success. The most recent example is Toys “R” Us. On 21 December 2017, its creditors approved a CVA designed to significantly reduce the company’s lease liabilities through managed store closures, with compromise payments to affected landlords at levels below their usual contractual entitlements.
MF Global CVA
But CVAs have many other uses. In the case of MF Global, creditors approved a CVA which provides them with optionality and facilitates a faster and more cost-effective distribution of monies to creditors. MF Global has been in special administration (a special type of administration for failed investment firms) since 2011.
To date, MF Global’s unsecured creditors have received distributions of 90 pence in the pound in respect of their debts. However, according to its special administrators, further distributions are not expected until at least 2 years’ time and a final distribution is not expected until 8 or 9 years’ time, due to complex issues which remain to be resolved in the special administration. Under the CVA, creditors will have a choice of (a) accepting an early distribution which will allow them to exit the special administration with a total return of 99.75 pence in the pound on their debts, or (b) remaining as creditors until the outstanding matters have been resolved, in exchange for a share of the potential future upside on the claims of the exiting creditors.
As well as giving choice to creditors who have different liquidity needs and appetites for investment, it is expected that the number of creditors (which currently exceeds 3,500) will significantly reduce, resulting in substantial cost savings for creditors as a whole.
This is a great example of the CVA process being used effectively alongside another formal insolvency process. It demonstrates the flexibility of the process, including how it can be used to deliver optionality for creditors who have different needs and objectives, and efficiencies. One can see the potential for this approach to be replicated in other complex financial services cases.