Company voluntary arrangement

Company voluntary arrangement

Contents

What is a company voluntary arrangement (CVA)?

A voluntary arrangement for a company is similar to a voluntary arrangement for an individual. 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.

Who can apply?

The following people can apply for the CVA:

  • the company directors, if the company is not yet in administration or liquidation;
  • the administrator if the company is in administration;
  • the liquidator if the company is being wound up.

A proposal for a CVA can, however, only be made if one of the following applies to the company:

  • it is registered in England & Wales under the Companies Act 2006 (or if applying in Northern Ireland any company registered under the Companies Act 2006 in Northern Ireland);
  • it is incorporated in an EEA state other than the UK (the company may only enter into a CVA in Northern Ireland if it has a principal place of business there); or
  • it is not incorporated in any EEA State, but it has its centre of main interest in a member state other than Denmark.

The CVA proposal has to be presented to the company's members and creditors for approval.

CVA with optional moratorium

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:

  • No winding-up petition may be presented to court.
  • A meeting of the company may only be called with the consent of the nominee or the court.
  • No resolution for the winding-up of the company may be passed.
  • No administration application may be made in respect of the company.
  • No holder of a qualifying floating charge (QFCH) may appoint an administrator of the company.
  • No administrative receiver may be appointed for the company.
  • No landlord or other person to whom rent is payable may exercise any right of forfeiture by peaceable re-entry or may enforce payment of rent using the commercial rent arrears recovery procedure with regard to premises let to the company, except if permission was obtained from the court.
  • No other legal proceedings against the company or execution or distress against the company's assets may be started or continued with, unless permission was obtained from the court.
  • No security over property of the company may be enforced except with permission of the court. A creditor with a floating charge may not take any steps that would have the effect of crystallising the floating charge. Where the security was granted by the company after the moratorium became effective that security can only be enforced if it was reasonably believed at the time of granting the security that it would benefit the company.

Effect of a moratorium on the company

The effect of a moratorium on the company includes:

  • During the moratorium, the directors remain in full control of the company although the nominee has a monitoring role.
  • The fact that a moratorium is in place in respect of the company has to be displayed on all communications whether in hard copy or electronic form.
  • The company may not obtain credit of £250 or more without making the person extending the credit aware that a moratorium is in force in respect of the company.
  • The company may only dispose, except in the ordinary course of business, of any of its property, or pay any debt or liability that was in existence before the start of the moratorium, if it is believed to benefit the company and either the moratorium committee (if any) or the nominee, approves the disposal or payment. If the property is charged, the company may only dispose of it if the security holder or the court consents.

Applying for a moratorium

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 administration processes. 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:

  • the company is in administration;
  • the company is being wound up;
  • there is an administrative receiver of the company;
  • a voluntary arrangement has effect in relation to the company; or
  • there is a provisional liquidator of the company.

Application for a moratorium

Step one

To get a moratorium the directors of the company must give the following to the nominee:

  • the terms of the proposed voluntary arrangement;
  • a statement of the company's affairs (with prescribed contents) setting out its assets, liabilities and the details of the creditors, made up not more than 2 weeks prior to the CVA proposal; and
  • any other information the nominee requests to enable them to complete the statement referred to in step two below.

Step two

The nominee must submit to the directors a statement in the prescribed form in which they set out whether in their opinion:

  • the company's proposal has a reasonable chance of being approved by the creditors and implemented;
  • the company is likely to have enough money available during the period of the moratorium to continue carrying on its business; and
  • the proposed voluntary arrangement should be considered by a meeting of the company and by the company's creditors.

Step three

The directors will then submit the following documents to court, to get the benefit of an immediately effective moratorium:

  • A document setting out the terms of the proposed voluntary arrangement
  • The same statement of the company's affairs that was submitted to the nominee in step one above
  • A statement (with prescribed contents) made and authenticated by the directors confirming that the company is entitled to apply for a moratorium under the Insolvency Act
  • A statement (with prescribed contents) made and authenticated by the nominee confirming that they are qualified to act as an insolvency practitioner in relation to the company and willing to act in the proposed CVA
  • The same statement that the nominee submitted to the directors in step two above

Step four

Once the above documents have been submitted to court the directors must notify the nominee that the moratorium has become effective.

Step five

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 registrar of companies;
  • the company;
  • any creditor of whose address they are aware, that has presented a winding-up petition regarding the company;
  • any enforcement agent or other officer changed with distress or other legal process against the company; and
  • any other person who has distrained against the company or its property.

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 day the company meets (or should've met) to consider the CVA proposal;
  • the day on which the creditors decide whether to approve the CVA proposal; and
  • 28 days after the start of the moratorium.

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:

  • the CVA proposal (or any amended proposal) has a reasonable chance of being approved and implemented; and
  • the company is likely to have enough money available during the remainder of the moratorium to enable it to continue trading.

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.

Moratorium committee

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:

  • Approve the CVA proposal
  • Extend or even further extend the moratorium period
  • Bring the moratorium to an end
  • Establish a moratorium committee
  • Approve the expected costs of the nominee during the extended moratorium period

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.

CVA without optional moratorium

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.

Step one

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:

  • a document setting out the terms of the voluntary arrangement they want to propose to the creditors;
  • a statement of the company's affairs setting out its assets, liabilities and the details of the creditors; and
  • any other information as may be prescribed.

Step two

Where the nominee is not the administrator or the liquidator, they must submit their report to the court, stating whether in their opinion:

  • the company's proposal for a voluntary arrangement has a reasonable chance of being approved and implemented; and
  • the proposals for the CVA should be considered by a meeting of the company and by the company's creditors (if so, giving at the same time the date, time and place for the company's meeting).

Step three

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:

  • arrange the company meeting for the date, time and place as is mentioned in their report; and
  • get a decision from the company's creditors by way of a qualifying decision procedure.

Contents of the notice of the creditors' decision procedure

The nominee's notice of the creditors' decision procedure must include prescribed contents, such as:

  • details to identify the proceedings;
  • details of the court to which the application for a CVA must be made (where there is no interim order in place) or in which the nominee's report of the debtor's proposal has been filed (where there is an interim order);
  • state how a creditor can propose amendments to the CVA proposal and how the nominee intends to deal with those;
  • a description of the decision procedure being used and all the required information to make it possible for the creditor to access the voting system and cast their vote;
  • a statement of the effects of the relevant provisions relating to creditors' voting rights, the calculation of creditors' voting rights and the required majority of creditors for making decisions;
  • state that a physical meeting to decide the matter will only be held if, within 5 business days from delivering the notice, 10% in value of the creditors or 10% in number of the creditors or 10 creditors request it.

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:

  • a copy of the proposal;
  • a copy of the statement of affairs or a summary listing the creditors and the amounts owed to them; and
  • a copy of the nominee's report on the proposal.

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 date that the nominee received the statement of affairs and proposal (in the case where no interim order was made); or
  • the date that the court considered the nominee's report on the proposal (where an interim order is in place).

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.

Creditor's decision procedures

The nominee may use any of the following for the creditors' decision procedure:

  • correspondence;
  • electronic voting;
  • virtual meeting; or
  • any other decision-making procedure that gives all the creditors who are eligible to vote an equal chance to do so.

Approval of the proposed CVA

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:

  • would cause the proposal to stop being a proposal for purposes of establishing a CVA;
  • affect the rights of any secured creditor to enforce their security, unless that creditor agrees to it;
  • would affect the priority of any preferential debts above those debts that aren't preferential, unless that preferential creditor agrees to it;
  • would result in secondary preferential creditors being paid in preference to ordinary preferential creditors unless the relevant preferential creditors agree to that; or
  • would result in unequal distributions among ordinary preferential creditors or among secondary preferential creditors.

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.

The value of a creditor's vote

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 debtor company is not being wound up, at the amount of the debt owed to them at the beginning of the moratorium if the company got one, and if not, on the date of the creditors' decision.
  • if the debtor company is being wound up or is in administration, at the amount of the debt owed to them on the date of its going into liquidation or of the administration order.

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 the decision

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.

The effect of approval of the CVA

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:

  • the supervisor of the CVA agrees to the termination;
  • the supervisor doesn't personally guarantee payment of the charges incurred after the date of the CVA;
  • the court grants permission; or
  • the post-CVA supply charges remain unpaid for more than 28 days after payment was due.

Challenge of decision to approve the CVA

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:

  • that it unfairly prejudices the interest of a creditor, member or contributory of the company; or
  • that there has been some material irregularity relating to the meeting of the company or the creditors' decision procedure.

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.