When a business appears to be no longer able to meet its debts and liabilities and becomes insolvent, it is always preferable to attempt to rescue the business as opposed to resorting to liquidation. If an agreement can be reached with a company’s creditors, it allows for continuity in hard-earned market reputation and retention of employees.
One mechanism for achieving formal agreement between a company and its creditors is the Company Voluntary Arrangement (CVA). All going well, through a CVA a company may able to arrange a gradated or periodic repayment plan that binds all creditors and retains control of the company in the hands of current directors.
Process of establishing a Company Voluntary Arrangement (CVA)
A CVA is available to companies or Limited Liability Partnerships (LLP), but not individuals. When a company or LLP becomes insolvent, the creditors will usually come together to appoint an Insolvency Practitioner who will oversee management of assets. Upon agreement of all company directors or LLP members, application can be made to the Insolvency Practitioner to seek a CVA.
There is a time limit of one month from the point the Insolvency Practitioner is appointed for a CVA arrangement, if applied for, to be negotiated with the company’s creditors. A threshold equivalent of creditors who hold 75% or more of unsecured debt must approve the Agreement, in a meeting chaired by the Insolvency Practitioner.
On the company’s end, the CVA must be agreed to by 50% or more of the company’s shareholders in a meeting also chaired by the Insolvency Practitioner.
Provided the business is deemed an adequate going concern that will return profit in future, the Insolvency Practitioner will oversee the repayment process. Upon being finalised, the CVA is filed in court.
The principal effect of a CVA is to prevent creditors raising court action for recovery of the debt through compulsory liquidation. However, during the period where the CVA is being drafted and considered, a company is still vulnerable to creditors’ attempts to pursue their claims. If a company qualifies as a small company, outlined below, it may be able to obtain a moratorium on claims pending completion of a CVA.
Effect of CVA upon non-voting creditors
As a CVA only requires creditors who possess a 75% threshold to approve repayments, the remaining 25%, and those who did not vote, are nonetheless bound by law to adhere to the Agreement.
Effect of CVA upon secured creditors
It is imperative to note that CVA are not effective upon secured creditors, including HMRC or banks, where creditors have a secured interest in company assets.
Corporate governance in the course of CVA
One of the primary benefits of entering into a CVA is that the current directors of the firm retain control over it, as opposed to relinquishing control to third parties in administration. A company may freely resume trading while a CVA is active.
If a company has to resort to administration, appointed third party administrators can request background reports on company directors from the Secretary of State. Successfully concluding a CVA will therefore shield directors from intrusive background enquiry.
Small company moratoriums
A qualifying small company will be able to obtain a 28-day moratorium on creditors’ claims pending the outcome of the CVA negotiations. Under the UK’s Companies Act, a small company will qualify if it has:
- turnover no greater than £6.5m;
- company assets that do not exceed £3.26m; and
- no more than 50 employees within the previous financial year or 12 months prior to the filing of the moratorium.
Creditor challenges to CVA validity
A creditor is able to challenge the terms of the CVA in court on the basis that it unfairly prejudices that creditor’s interests. Alternatively, the CVA can be challenged on the basis of irregularity in the approval process. Any challenge must be filed within 28 days of the Insolvency Practitioner filing the outcome of the creditor’s approval meeting.
Failure to adhere to terms of the CVA
If the company subsequently fails to keep up due payments under the CVA, it may be subject to compulsory liquidation by the creditors through application to the relevant court.
Alternative to CVA
A pre-package sale is achieved where, in anticipation of insolvency, a company has its assets professionally valued and then designated for sale. In most cases, the company’s shareholders and directors will simply buy back the company assets after sale, reimburse the creditors and form a new company.
The benefits of a pre-package sale over a CVA is that the latter can entail payment plans that last several years. By contrast, a pre-package sale is a far more expedient process that enables a fresh start.
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A CVA is a sound means of ensuring continuity of business operations and continued director control. In order to be accepted however, the company must have a healthy prospect of recovery. A CVA will also offer no protection from a secured creditor, and is therefore only of use for companies with unsecured creditors.
The Insolvency Solicitors at Lewis Nedas have served a wide range of clients with their financial affairs during difficult times, including directors in insolvency and stakeholders such as banks, sponsors and landlords. We have provided expert advice on salvaging company prospects, including reorganising and restructuring of debts.
For further information or to speak to our expert Corporate Recovery & Insolvency Lawyers please contact us on 020 3811 6792 or complete our online enquiry form.