What is a Company Voluntary Arrangement [CVA]?
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A Company Voluntary Arrangement [CVA] is a debtor-in-possession insolvency solution. It is sometimes referred to as a Corporate Voluntary Arrangement, but this incorrect terminology.
A CVA is a formal insolvency process in which a company and its creditors enter into a legally binding agreement over the payment of its debts. Old debt is effectively “ring-fenced” and repaid in full or in part over an extended period of time. A CVA does not necessarily mean that all creditors will be paid in full.
The CVA process gives a company breathing space in which to trade out of its difficulties or achieve a better realisation of its assets than a Liquidation or Administration. Most trading CVAs rely upon profits being generated and monthly contributions of surplus funds being paid to the Supervisor of the CVA for onward transmission to the creditors. CVAs usually run for between 2-5 years.
The formal legal process is governed by the Insolvency Act 1986 [the Act] and The Insolvency Rules [England and Wales] 2016 [the Rules] for companies that are incorporated in England and Wales. The legislation relating to companies incorporated in Scotland and Northern Ireland is very similar to the law in England and Wales.
A Licensed Insolvency Practitioner [LIP] will act as Nominee in the run up to the agreement of the CVA and as Supervisor. He/she could also act as Monitor [see below] A LIP is an individual licensed so able to act by one of a number of licencing bodies. The bodies with the largest numbers of licence holders are the Institute of Chartered Accountants in England and Wales [the ICAEW] and the Insolvency Practitioners Association [the IPA].
Importantly, the Supervisor does not run the affairs of the company. These are left in the hands of the directors throughout the process and the role of the LIP is very much that of “honest broker and referee” ensuring that the terms of the CVA are adhered to by both sides.
Legal Protection in a CVA
The new Corporate Insolvency and Governance Act 2020 (CIGA) which came into force on 26 June 2020 replaces the old law and introduces a new stand-alone moratorium to help facilitate the rescue of a company by way of a CVA. In such circumstances, the moratorium will protect the company from creditor interference whilst the CVA is drawn up. The free-standing breathing space can be up to 40 business days and could be extended up to 12 months with creditor consent or more if the court so agrees. It will provide the company with time, free from creditor interference and threat of legal action, to plan and negotiate the terms of an acceptable Proposal with the creditors.
The moratorium process is overseen by a Monitor who must be a LIP. The Monitor’s role can be summarised as follows:
- To check that the company is eligible for a moratorium
- To confirm that the company is more likely than not to survive as a going concern
- To notify Companies House and creditors of the moratorium coming into force
- Monitor the company during the period of moratorium to confirm continued eligibility
- Sanction asset disposals outside of the normal course of business
- Sanction the granting of any security over the company’s assets
- Bring the moratorium to an end where necessary
- Exercise his/her professional judgement throughout act as an Officer of the Court
In practice, it is unusual for a company to require this protection as, at an early stage, the key creditors are engaged to ensure that they are in agreement with the proposed course of action, thereby negating the need for a moratorium.
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How do companies go into CVA?
The more usual CVA, without moratorium, usually starts with a board meeting of directors resolving to put forward a Proposal [aka a Business Plan] to creditors to place the company into a CVA. The Proposal is a document that the directors will prepare working closely with a LIP who at that stage is known as the Nominee. A draft of the Proposal is often discussed, before final engrossment, with the company’s bankers and larger creditors. It will most likely incorporate an integrated financial model showing monthly profit and loss and cash-flow statements which will need to demonstrate profitability, cash generation and sufficiency of working capital.
The Nominee will send the Proposal to the court, shareholders, and creditors.
Approval of CVA/meeting of creditors
The introduction of the new Rules [see above] on 6 April 2017 has sought to remove the need for a physical meeting of creditors although one can be summoned if certain criteria are met. Creditors have to be given due notice of a Decision Procedure and given a Decision Date which means the date when a decision is to be made in a Decision Procedure. Effectively, the Rules aim to achieve “non-meeting” decision processes completed by correspondence which include email and electronic voting and resolutions by correspondence.
The creditors must be given at least 14 clear days’ notice of the Decision Process. The creditors will vote on whether or not to accept the Proposal and may seek to impose modifications.
The CVA must be approved by a majority of over 75% [by value] of the Unsecured Creditors voting. Accordingly, if the requisite majority is achieved, any creditor that voted against the directors’ Proposal or did not bother to vote is still bound by the terms of the agreed CVA.
Effect of a CVA
When approved, a CVA binds all Unsecured Creditors of the company, even if certain creditors did not bother to vote at the meeting of creditors or voted against the directors’ Proposal. Creditors will not be able to take any alternative action to recover their outstanding debt.
In CVAs where the company is to continue trading to generate profits for the benefit of the bound creditors, the directors will be left to get on with the running of the business, whilst the Supervisor will agree the claims of creditors and pay out dividends on a periodical basis [usually every 6 months]. In addition, the Supervisor is legally obliged to report to creditors on an annual basis and at the end of the process.
End of the CVA
On the successful conclusion or indeed failure of the CVA, the Supervisor will notify Companies House and prepare a final report to shareholders and creditors.
Advantages and benefits of a CVA
CVAs work best when a company has good trading prospects, despite currently suffering from past financial problems.
The advantages can be summarised as follows:
- The directors remain in control of the company’s business-a “debtor-in-possession procedure
- An independent LIP will ensure that the terms of the CVA Proposal are adhered to by the company, thereby giving comfort to creditors
- Protection from creditor actions, by way of a formal moratorium, can be implemented at the outse
- On achieving the requisite majority in favour, all unsecured creditors are bound by the terms of the CVA, even if certain creditors voted against or did not bother to vote at all
- Historic creditor claims are effectively ring-fenced and will be repaid in full or in part over an extended period of time-usually 2-5 years
- Part of creditor claims may be written off as part of the terms
- Interest and charges on existing creditor claims are frozen once the CVA has been accepted
- The process allows for the restructuring of the company’s workforce prior to implementation of the CVA with employee claims settled by the Government which in turn will make a claim to the company that will be bound by the terms of the CVA Proposal
- The freezing of historic debts often leads to a significant cash-flow boost at the outset of the CVA
- There is no submission director conduct reports to the Insolvency Service
- The company does not have to disclose on its headed paper or website details of the CVA
In conclusion
Directors and shareholders who truly believe in their company’s prospects and can back that belief up with solid business assumptions can keep full control of the company’s affairs by utilising this debtor-in-possession formal procedure. A CVA, undertaken in a true spirit of openness and fair-dealing will be of benefit to all parties that have a stake in the company’s future success.
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Frequently Asked Questions (H2)
What are “Antecedent Transactions”?
These are transactions between a Bankrupt and another party [usually a creditor or a third party] that take place before bankruptcy commences and might be subject to challenge by the Trustee in Bankruptcy. Preferences, Gifts and Transactions at Undervalue are the commonest types. If the challenge is upheld, the beneficiary of such transactions can be ordered, by the court, to pay monies into the Bankrupt’s estate by way of restitution.
In an Individual Voluntary Arrangement [“IVA”], the Debtor must disclose details of such transactions in his Proposal to creditors.
Insolvency-Online will help you identify which transactions may be vulnerable to challenge and provide you with clear advice as to your options.
How do I pay for the liquidation of my company?
These are transactions between a Bankrupt and another party [usually a creditor or a third party] that take place before bankruptcy commences and might be subject to challenge by the Trustee in Bankruptcy. Preferences, Gifts and Transactions at Undervalue are the commonest types. If the challenge is upheld, the beneficiary of such transactions can be ordered, by the court, to pay monies into the Bankrupt’s estate by way of restitution.
In an Individual Voluntary Arrangement [“IVA”], the Debtor must disclose details of such transactions in his Proposal to creditors.
Insolvency-Online will help you identify which transactions may be vulnerable to challenge and provide you with clear advice as to your options.
What do I do with a Winding Up Petition?
These are transactions between a Bankrupt and another party [usually a creditor or a third party] that take place before bankruptcy commences and might be subject to challenge by the Trustee in Bankruptcy. Preferences, Gifts and Transactions at Undervalue are the commonest types. If the challenge is upheld, the beneficiary of such transactions can be ordered, by the court, to pay monies into the Bankrupt’s estate by way of restitution.
In an Individual Voluntary Arrangement [“IVA”], the Debtor must disclose details of such transactions in his Proposal to creditors.
Insolvency-Online will help you identify which transactions may be vulnerable to challenge and provide you with clear advice as to your options.
What are “Time to pay arrangements”?
These are transactions between a Bankrupt and another party [usually a creditor or a third party] that take place before bankruptcy commences and might be subject to challenge by the Trustee in Bankruptcy. Preferences, Gifts and Transactions at Undervalue are the commonest types. If the challenge is upheld, the beneficiary of such transactions can be ordered, by the court, to pay monies into the Bankrupt’s estate by way of restitution.
In an Individual Voluntary Arrangement [“IVA”], the Debtor must disclose details of such transactions in his Proposal to creditors.
Insolvency-Online will help you identify which transactions may be vulnerable to challenge and provide you with clear advice as to your options.
What is “Turnaround Finance”?
These are transactions between a Bankrupt and another party [usually a creditor or a third party] that take place before bankruptcy commences and might be subject to challenge by the Trustee in Bankruptcy. Preferences, Gifts and Transactions at Undervalue are the commonest types. If the challenge is upheld, the beneficiary of such transactions can be ordered, by the court, to pay monies into the Bankrupt’s estate by way of restitution.
In an Individual Voluntary Arrangement [“IVA”], the Debtor must disclose details of such transactions in his Proposal to creditors.
Insolvency-Online will help you identify which transactions may be vulnerable to challenge and provide you with clear advice as to your options.
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