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”) to act as advisor on the options available to the company in the specific circumstances. If the directors 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.

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 as detailed in the CVA. 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.

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 flexibility as 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 in relation to CVA debts 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.

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 thresholds 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.

An insolvency practitioner must be engaged at an early stage to help prepare the proposals to creditors. The insolvency practitioner will work closely with the company and its directors 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.

Once the proposals have been finalised, the nominee will 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.

For the CVA to be approved, there is a two-stage voting threshold:

• 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.

There are several instances where a creditor may challenge a CVA:

1. If a creditor considers that they are unfairly prejudiced, they may apply to court for an order revoking the CVA.
2. 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.
3. 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.
4. 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.

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.

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, the arrangement can be terminated early. Creditors may then take legal action to recover the remaining debts, and the company may face liquidation. The failure to meet the terms of the CVA usually results in the company being unable to continue operating under the arrangement.

If the creditors or the court believe that the CVA is no longer viable or in the best interests of all parties involved, they may agree to terminate the CVA.