- 09 August 2021
- Restructuring and insolvency
In tandem with our article on retention of title clauses, this article provides a brief overview of Company Voluntary Arrangements (CVAs). A CVA is one of a number of insolvency procedures designed to address a company’s financial difficulties by entering into a binding contract with its unsecured creditors, i.e. those who do not have the benefit of any security interest in the assets of the company. These are likely to include: customers, suppliers, contractors, landlords etc.
In essence a CVA’s true aim is to avoid the complete dissolution of a company by reaching an agreement, often with severe compromises, with its creditors. The agreement is likely to mandate new and reduced payments structures for the company’s debts in the pursuit of long-term financial survival.
The process of a CVA
In the majority of circumstances, it is the directors of the company that propose the CVA. However, should the company have already appointed an administrator or liquidator, they too may propose a CVA as part of their action plan. First, it is for the directors of the company to draft proposals of how they expect to reduce the company’s debt and remain solvent.
This will usually include a detailed analysis of their debtor base and the drafting of schemes such as, deferred payment, reduced debt or debt for equity, that will help mitigate the company’s losses. At this stage the directors will nominate a professional insolvency practitioner. It is for the nominee to supervisor and implement the proposals that make it beyond draft form.
Once the nominee has received the draft proposals and a statement of the company’s affairs from the directors, they have a maximum period of 28 days to decide whether to put the proposals to the company’s members and creditors. The proposals only become binding if at least 75% (by value) of the creditors vote in their favour. The members of the company can approve the proposal by a simple majority. However, whether they do or not is immaterial
If they are approved, the nominee then takes up a role as supervisor to implement the CVA, including the power to petition for the company’s liquidation should it not be able to meet is commitments under the CVA. The final job of the nominee is to make a final report, within 28 days of completion of the CVA, to the members and creditors.
In essence a CVA’s true aim is to avoid the complete dissolution of a company by reaching an agreement, often with severe compromises, with its creditors.
Advantages of entering into a CVA
The main advantages to a company looking to enter into a CVA with its creditors are as follows:
- A CVA can be end up being a relatively straight forward, easy and informal procedure. Arrangements under a CVA seldom involve litigation or court proceedings, except in circumstances where they are directly challenged. In certain circumstances therefore, this means that the CVA method can be relatively inexpensive in comparison to other insolvency procedures, ultimately leaving more funds available to the creditors.
- The CVA will bind all unsecured creditors, even those who voted against the proposal. This could be up to 25% of the company’s unsecured creditors. However, it should also be noted that creditors do have the power to formally challenge the CVA if it unfairly prejudices its position.
Disadvantages of a CVA
There can also be disadvantages to the company, careful consideration should be made and legal advice sought before deciding which arrangement is best suited to the company’s situation. We have summarised two key disadvantages below:
- The most commonly cited weakness of the CVA procedure is that the company is not given an automatic statutory moratorium to prevent creditors from taking litigious action. A statutory moratorium is only available to companies in administration and stops creditors from taking action against the company or its assets during the administration period. A statutory Moratorium does not alter the rights of the creditors, it only suspends them.
- The CVA will not bind the company’s secured or preferential creditors, i.e. creditors of the company who hold fixed or floating charges over the company’s assets. The most common example here is a bank or lender; this can account for the largest of the company’s debts. The effectiveness and success of the CVA procedure therefore will be based on the company’s ability to meet its obligations to all creditors, both secured and unsecured.
For further information on CVAs, advice, or if your business is struggling to emerge into a post-pandemic economic climate, our business recovery team are experienced in providing, clear, practical and detailed support.
This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.
About this article
SubjectCompany Voluntary Arrangements: An Overview
ExpertiseRestructuring and insolvency
Published09 August 2021
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