A Company Voluntary Arrangement (“CVA”) is a contract made between the company and its creditors under the provision of the Insolvency Act 1986 to resolve the company’s debts. It allows a company to come up with an arrangement with its creditors to resolve some, if not all, of its debts. Once the CVA is in effect, the creditor cannot claim from the company for its former debt.
The procedure of CVA can be found in Part I of the Insolvency Act 1986 and the Insolvency (England and Wales) Rules 2016. The procedure will be supervised by an Insolvency Practitioner to ensure the proposal is fair and in accordance with the legislation. Usually, the Insolvency Practitioner will be appointed as the nominee.
It requires approval from the necessary majorities of the company’s creditors and shareholders to implement the CVA. A majority of three-quarters or more of the creditors must vote in favour of the CVA proposal to implement it and more than half in value of the company’s shareholders present in person or by representative to vote at the meeting on the resolution to approve the CVA. If the proposal is approved, the CVA will commence based on the proposed terms. The company, its shareholders and its creditors will be obligated to follow the terms regardless of whether the creditors voted against it or did not vote.
What is the purpose of a CVA?
The purpose of a CVA is to offer an alternative solution to the creditors that will resolve the company’s debts rather than going straight to insolvency procedure. Generally, a CVA will be a better alternative to creditors as the company will be able to continue to operate if a CVA is reached and a higher chance of repaying its debt. Once the CVA is successfully completed, the company will be absolved of its debts and return to solvency. The company will be able to avoid going into liquidation through a successful CVA.
An approved CVA proposed by the company’s directors allows the directors to remain in control of the company whilst executing an arrangement that would allow the company to pay the creditors in a proportion of what they are owed.
Who can propose a CVA?
The company’s directors or a liquidator (if the company is in liquidation) or an administrator (if the company is in administration) may suggest to the company and its creditors for a CVA. A CVA can be proposed when the company is about to be insolvent but could be salvage through a CVA. Nevertheless, the Insolvency Practitioner will have to be satisfied that the company has a going concern business.
There is no statutory requirement stating that CVA is to be proposed by company going into insolvency or unable to pay its debts. However, it is usually proposed where there is a risk of insolvency.
Forms of CVA:
There are 2 forms of CVA:
- A CVA with a moratorium
- A CVA without a moratorium
A CVA does not automatically provide the company with a moratorium against current and future legal action hence the use of moratorium is optional.
Who can apply for a CVA with moratorium?
Only the directors may obtain a moratorium for the company if they intend to propose a CVA to the company’s creditors. Otherwise, it would not be available. Nonetheless, the directors must ensure that the CVA has a good prospect of being accepted in a meeting with the company’s creditors and members which will be held within 28 days of the date the moratorium is obtained.
A company is eligible for a moratorium if it satisfies two of these three conditions:
- Has a turnover of less than £2.8m
- Has a balance sheet total of less than £1.4m
- Has less than 50 employees
For medium or large companies, a moratorium will only be eligible if a CVA is combined with an administration. Thus, the company must be in administration for moratorium to be available. However, it should be noted that where a company in administration proposes a CVA, the administrator will be in control of the company instead of the company’s directors.
Can a CVA be challenged?
Yes, any person entitled to vote on the proposal can challenge the execution of the CVA through an application to court within 28 days of the date the result of the vote is filed in court on the basis that:
- The CVA unfairly prejudices their interests; or
- There has been some material irregularity at or in relation to either of the meetings to seek to set aside the decision at the meetings
In relation to the prejudice challenge, if the CVA leaves a creditor in a worse position than he had been in before then the CVA would be considered as prejudicial. In determining whether the prejudice is unfair, the court will likely compare the challenger’s position with other creditors and the court will also consider whether the challenger’s interest would have been better off if the company had been liquidated.
The court may also revoke or suspend any decision approving the CVA and give directions as it thinks fit to the person who made the original proposal to consider making amendment to it.
Benefits and risks of CVA
- Company can avoid going into liquidation if steps are taken immediately.
- Company will be able to repay its debts by way of instalments depending on the terms agreed upon.
- Implementing CVA does not require a court hearing hence it is cheaper than other procedure unless the CVA is being challenged.
- The existing company directors remain in control of the company unless the company is in administration.
- Do not have to inform the public or customers that the company is entering into a CVA.
- Unfair to dissentient creditors as they will be obligated to follow the terms of CVA despite having voted against CVA.
- It does not bind secured creditors or preferential creditors
- CVA will only work if the company has going concern
- Company’s directors may use CVA to delay liquidation
In my opinion, the current CVA moratorium available should be reviewed as the benefits of CVA differ according to the size of the company. The current legislation only allows small companies in financial difficulties to have the alternative to ask for moratorium order while medium and large companies do not enjoy the same luxury. It should be expanded to cover all regardless of whether it’s a small, medium or large companies.
Nicole David (City Law School)