A voluntary arrangement for a company is similar to a. Its aim is to help the company address its financial difficulties and avoid liquidation. It therefore allows the company to come to an arrangement with its creditors over the payment of its debts.
The proposal for a CVA will nominate an insolvency practitioner to supervise the implementation of the CVA. Before the CVA is approved, that person is known as the nominee. If the proposal is made by an administrator or liquidator, they will often also be the nominee.
The person appointed to supervise the implementation of the CVA, who may be the nominee or another insolvency practitioner, is called the supervisor.
The following people can apply for the CVA:
A proposal for a CVA can, however, only be made if one of the following applies to the company:
The CVA proposal has to be presented to the company's members and creditors for approval.
No automatic protection against creditor enforcement action is given to a company during the time it prepares the proposal for a CVA to its final approval. However, directors of eligible small companies may apply for a moratorium, lasting 28 days (unless extended) to cover this period. A moratorium comes into force when the application is filed with the court.
Bigger companies that don't have the option of applying for a moratorium, could instead combine a CVA with an administration whereby they will have the benefit of the statutory period of protection while the administration is being put in place. The administrator can then take the required steps to put a CVA in place thereafter.
Effect of a moratorium on creditors
The effect of a moratorium on creditors includes:
Effect of a moratorium on the company
The effect of a moratorium on the company includes:
A company can't apply for a moratorium if it is already being wound-up or under administration. It wouldn't need a moratorium as it will already have the protection given by the winding-up and. Only the directors of a company that can therefore apply for a moratorium.
Certain companies are excluded from applying for a moratorium because of the type of business they run, while all companies would be excluded if, for example, on the date of filing:
Application for a moratorium
To get a moratorium the directors of the company must give the following to the nominee:
The nominee must submit to the directors a statement in the prescribed form in which they set out whether in their opinion:
The directors will then submit the following documents to court, to get the benefit of an immediately effective moratorium:
Once the above documents have been submitted to court the directors must notify the nominee that the moratorium has become effective.
The nominee must, in the Gazette and in any other manner they think fit, advertise that a moratorium is effective regarding the company. They must also give notice to:
The nominee must arrange for the company at a meeting and the creditors by way of a qualifying decision procedure, to consider the CVA proposal.
Duration and extension of the moratorium
The moratorium comes into force when the documents applying for the moratorium are filed with the court.
The moratorium ends (unless it is extended as explained below or terminates prematurely) on the latest of these dates:
The meeting of the company may resolve and creditors through the qualified decision procedure may decide either to approve the proposed CVA (with or without modifications), or to extend the moratorium. This extension may not be for more than 2 months and 28 days calculated from the start of the moratorium.
The nominee has a duty to monitor the company's affairs during the period of the moratorium to enable them to form an opinion whether:
Before the meetings may decide to extend the period of the moratorium, they have to consider what the nominee has done so far about their above duties and what the cost of that is. They also have to consider how the nominee intends complying with their above duty during any extended moratorium period and what the cost of that is. They then have to approve those costs or else the moratorium will come to an end.
Notification of extension and end of moratorium
If the moratorium is extended as discussed above the nominee has to notify the registrar of companies and the court. If the extension was granted by the court a copy of the court order must be sent to the registrar of companies.
When the moratorium comes to an end the nominee must advertise this and notify the court, the registrar of companies, the company and any creditor of whose claim the nominee is aware.
If the moratorium is extended (see above) a moratorium committee may be put in place by resolution of a company meeting or a decision of the creditors with the consent of the nominee. This committee will be given specific functions by the company meeting or the creditors. The moratorium committee by law has to consider whether to approve any disposal of company property or payment of a creditor during the period of the moratorium. When the moratorium comes to an end the moratorium committee ceases to exist.
Decisions of the company and creditors during the moratorium period
The following decisions must be made, whether to:
If the company and the creditors come to different decisions regarding any of the above, the decision taken by the creditors will become effective, unless a member of the company, within 28 days from the date of the company meeting or the creditors' decision, whichever is the later, applies successfully to court.
How to obtain CVA without an optional moratorium
The CVA proposal must name a person to act as the nominee in relation to the voluntary arrangement. Unless replaced by the company or creditors on approval of the CVA, the nominee will become the supervisor and be responsible for the implementation of the CVA. If the company is already in administration or being wound-up the administrator or liquidator respectively will usually be the nominee.
Where the nominee is not the administrator or the liquidator, the person intending to make the proposal must submit the following to the nominee, to enable them to prepare a report that they must file at court within 28 days:
Where the nominee is not the administrator or the liquidator, they must submit their report to the court, stating whether in their opinion:
The nominee (who is not the administrator or the liquidator) will only take this next step if their report to the court stated that the company and creditors should consider the CVA proposal as it is likely to be accepted. The nominee will:
The nominee's notice of the creditors' decision procedure must include prescribed contents, such as:
The nominee may also include a notice that the results of the consideration of the proposal will be made available for viewing and download on a website and that no other notice will be sent to the creditors that received notice of the creditors' decision procedure.
The notice must also include, unless it has previously been supplied to the creditors:
The notice must set the date for the decision to be made, no sooner than 14 days after delivery of the notice, and not more than 28 days after:
The notice must be authenticated and dated by the nominee.
The creditors' decision procedure will be competent to act if the nominee gets one valid vote on or before the decision date.
The nominee may use any of the following for the creditors' decision procedure:
The company and creditors will decide whether to approve the proposed CVA in the form it was presented, with amendments or not at all. They may decide to appoint a different person qualified to act as an insolvency practitioner regarding the CVA instead of the nominee. They can however not approve any changes to the CVA proposal that:
For the CVA to come into force, three quarters by value of all the creditors responding in the creditors' decision procedure must vote in favour of it and there must not be votes against it by more than half in value of all unconnected creditors.
If the creditor's claim against the debtor company is for a liquidated amount, the value of a creditor's vote is valued:
If the creditor's claim against the debtor company is for an unliquidated amount or an amount that has not been ascertained, the value of a creditor's vote will be set at £1 unless the chairman of the meeting agrees to put a higher value on it.
After conclusion of the company's meeting and the creditors' decision procedure, the chairman of the meeting and person who sought the decision from the creditors must respectively report the result to the court and give notice of it to prescribed persons.
If the company and the creditors' meeting make different decisions when considering the proposal, the decision taken by the creditors will become effective, unless a member of the company successfully applies to court within 28 days from the later of the date when the decision was taken by the creditors and date the decision was taken at the company meeting.
If the CVA approval is not challenged and the company is either in liquidation or administration at the time of the CVA approval the court may either order a stay of the winding-up proceedings, cancel the administrator's authority to act in that capacity or give directions for the further conduct of the winding-up or administration so that the implementation of the CVA can be made possible.
When the CVA is approved it will take effect as if made at the time the creditors decided to approve it. It will then bind every person that was entitled to vote in the creditors qualifying decision procedure, whether or not they had notice of it, as if they were party to the CVA. However, they may challenge the decision to approve the CVA.
A secured creditor's rights are however not affected by a CVA as they are not entitled to vote on the proposal of a CVA except to the extent that their debt is unsecured. However, the secured creditor can agree to be bound by the CVA by, for example, valuing their security at nil and proving their debt as an ordinary unsecured creditor, allowing them to vote in the CVA.
Where a secured creditor values its security at less than what is due to them and agrees to be bound by the CVA for the shortfall, the specific terms of the CVA could determine whether the secured creditor's security will be affected or whether they would still be entitled to recover the full outstanding debt in the event that the securing asset is sold for more than the value placed on it by the secured creditor. The secured creditor must, however, agree to any proposal that affects its security.
Specified providers of certain essential services such as water, gas, electricity, communication services and IT supplies, are by law prohibited from requiring payment of outstanding charges, for services supplied to the business prior to the date of the approval of the CVA, as a condition for the continued supply thereafter. Also any insolvency related contractual term of an essential services supply agreement that enables the supplier to charge higher prices or terminate the contract will have no effect where a CVA is approved. This means that the essential services supplier will only be able to terminate the contract of supply if:
Any person entitled to vote and the nominee (including the liquidator or administrator where the company is being wound-up or under administration) may challenge the approval decision on the following grounds:
The existence of unfair prejudice will be decided on the facts of each case. For example, it would be unfair prejudice if the proposal of the CVA itself treats creditors in a particular class differently to one another; a creditor would be unfairly prejudiced if the effect of the CVA proposal is to deprive them of a right of recovery of the outstanding debt due to them, without a fair compensation for that loss.
A material irregularity would also depend on the facts of each case. For example, it would be a material irregularity if the action or omission complained of as irregular materially impacted the way in which the creditors decided to vote. This includes not disclosing information that might have led creditors to vote in a different way.
A challenge must be made within 28 days of the report on the outcome of the voting being made to court or from the date a creditor who was not notified of the voting became aware of it.