
Restructuring & Insolvency
Company Voluntary Arrangements
A company voluntary arrangement (“CVA”) is a process whereby a company in financial distress reaches an agreement with its creditors to settle its debts by paying a portion of the sum due, or by coming to some other arrangement with its creditors over the payment of its debts, with a view to enabling the company to continue to trade. It is in essence a compromise where creditors agree to a reduced recovery of the debts owed to them in return for the business continuing to trade, and usually allows the company to avoid entering into administration or liquidation. It is also possible for a CVA to be proposed while the company is already in administration so as to implement a compromise between creditors.
The directors of the company in distress would first approach an Insolvency Practitioner (“IP”) who would act as an advisor on the various options available to the company in the specific circumstances. If the directors then choose to pursue a CVA, the IP (now in the role as “nominee”) will assist in preparing proposals, that are specific to that particular business, to put to the company’s creditors. Once the proposals are approved, the IP will take the role as “supervisor” in overseeing the CVA and ensuring compliance with its terms.
Edwin Coe’s dedicated team of restructuring and insolvency experts are well-placed to advise companies, directors, or creditors in the negotiation and implementation of a CVA.
Services we offer in this area:
- Acting for and advising IPs in relation to their statutory obligations as nominees and supervisors of CVAs
- Advising directors or companies in financial difficulty on the process and formalities of: preparing proposals meetings to vote on the porposals; and following approval of a CVA
- Advising creditors or other interested parties in relation to proposals and approved CVAs
- Advising creditors on applications to challenge CVAs, whether by way of material irregularity or unfair prejudice
Should you require any assistance in respect of general advice in relation to CVAs, proposing a CVA or challenging a CVA, call our team today for an informal and no obligation discussion.
Legal Insights
Edwin Coe’s Restructuring & Insolvency team has put together a series of blogs on all matters administration related, covering background and insights into the process, technical guidance, case law updates and practical tips:
- Advising the nominee and subsequently the supervisor, on a CVA.
- Advising a supervisor of a CVA in respect of a challenge application made by significant creditors.
- Acting for directors and companies considering a CVA or already subject to an approved CVA.
- Personal Insolvency
Claims against Directors
- Fraudulent Trading
- Wrongful Trading
- Preferences
- Transactions at an Undervalue
- Directors’ Disqualification
- Overdrawn Directors’ Loan Accounts
- Misfeasance
Other Contentious Insolvency Work
Key Information
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What is the effect of a CVA?
A CVA binds all unsecured creditors of a company who were entitled to vote on the proposals, such that they all must act in accordance with its terms. The CVA is therefore also binding on those creditors who did not vote or who voted against the proposals.
A CVA usually involves a compromise by the company’s creditors such that they only recover a certain proportion of the debt owed through an agreed mechanism. Once a CVA has been approved, the IP, now referred to as the supervisor, ensures that all parties act in accordance with its terms. In the first instance, disputes arising from the CVA will be managed by the supervisor, although it is possible to refer matters to the courts when an agreement cannot be reached. An important feature of a CVA is that they do not bind secured creditors.
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What are the pros of a CVA?
The pros of a CVA include:
- The directors maintain control of the company, which is particularly beneficial if they have specific expertise to assist in turning the company around.
- Compared to other insolvency processes, the process of obtaining a CVA is often considerably cheaper;
- CVAs offer greater flexibilityas compared to other statutory insolvency processes.
- CVAs are not public processes, they are an arrangement between the company and its creditors.
- Any ongoing legal action that has already been commenced against the company prior to the approval of a CVA is stayed (paused) following approval of a CVA;
- Given the inherent nature of CVAs binding all unsecured creditors, repayment demands by creditors are also stayed on approval of a CVA;
- A creditors’ meeting is held during the approval process of a CVA; once approved, creditors cannot take legal action against a company in respect of the debts bound by the CVA;
- The aim of a CVA is to enable a distressed company with a viable business to trade through a period of financial difficulty, and so prevent administration or liquidation. Accordingly, it is not usually the case that the conduct of directors is investigated by the supervisor of a CVA.
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What are the cons of a CVA?
The cons of a CVA include:
- The company’s credit rating will be affected making it harder to obtain credit from new suppliers;
- There are voting thresholds to enable approval of a CVA and these threshold are not always met, such that entry into a CVA is not a certainty;
- The term of a CVA is flexible, but often runs between three and five years. Some stakeholders and creditors may oppose a CVA on this basis alone. If this is the case, the company may need to consider other options such as a pre-pack administration.
- Secured creditors are not bound by the terms of a CVA, which can result in administrators being appointed even if a company is otherwise complying with an approved CVA.
- Failure of a CVA can lead to creditors taking legal action against the company.
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How is a CVA put in place?
An IP must be engaged at an early stage to help prepare the proposals to creditors. The IP will work closely with the company and its directors in order to balance the needs of different stakeholders to achieve an outcome which is viable for the interests of the creditors as a whole. There is specific guidance setting out professional standards and requirements for the proposals with which the nominee will need to comply.
Once the proposals have been finalised, they must be formally delivered to the nominee. The nominee will then have 28 days in which to consider the viability of the proposed CVA and submit a report to the court as to whether, in their opinion, the proposal should be put to the company’s creditors and shareholders.
Once approved by the nominee, the proposed CVA is circulated to creditors and shareholders (if so advised) for their consideration and approval, along with a statement of affairs prepared by the persons making the proposal. As with any formal process, it is essential to ensure that service takes place by a permitted procedure, and careful consideration must be given to ensure that the notice is compliant with the relevant provisions of the Act.
For the CVA to be approved, there is a two-stage voting threashold:
- First, at least 75% of the company’s creditors by value must vote in favour;
- Secondly, no more than 50% ( by value) of the unconnected creditors may vote against the proposal.
Where the company’s shareholders have been asked to vote on the proposals, their vote may be passed by a simple majority in value.
Generally, a CVA is put in place from the time when the company’s creditors approve the proposals made in respect of the company, however the proposals themselves may provide for the CVA to take effect from a different date.
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Can a creditor challenge a CVA?
There are several instances where a creditor may challenge a CVA:
- If a creditor considers that they are unfairly prejudiced, they may apply to court for an order revoking the CVA.
- A creditor may also seek a revocation order where they consider there to have been a material irregularity in the conduct of the procedure approving the proposals.
- A creditor may challenge the voting rights or values attributed to itself or another creditor in the voting process. Where such a dispute arises, in the first instance the nominee will adjudicate and make a decision on how the creditor is to be treated. A creditor may apply to court if they do not agree with the decision reached, but unless it can be shown that the nominee acted in bad faith, it is unusual for the court to overturn their decision.
- A creditor may pursue an alternative insolvency procedure as a CVA does not provide the company with a protective moratorium. As such, the likelihood of enforcement action from a creditor must be carefully considered before deciding to proceed with issuing proposals. However, once a CVA has been agreed, those creditors who are bound only have limited recourse for recovery of debts owed to them.
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Can a secured creditor challenge a CVA?
Unless the secured creditor has specifically agreed to be bound, a CVA cannot affect its rights of enforcement. For this reason, secured creditors may only vote as far as they have any unsecured debts against the company.
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How does a CVA come to an end?
Once the terms of a CVA have been satisfied, the CVA will come to an end. The company will be able to trade without the risk that the CVA creditors are able to bring a claim for any unpaid amounts due from the CVA debts.
If a company defaults on or breaches the terms of the CVA, it could lead to the liquidation of the company, the distribution of the company’s assets by the supervisor in order to satisfy outstanding sums owed to creditors or the CVA no longer binding the creditors therefore leaving the company open to legal action.
Contact our Restructuring & Insolvency Team
telephone: 020 7691 4000
or email: enquiries@edwincoe.com