Voluntary Arrangements

A CVA is a potential rescue mechanism available to a company and is an alternative to liquidation.

It is a compromise or other arrangement which is implemented by an Insolvency Practitioner. An Insolvency Practitioner is

The procedure allows a company to:

  • To settle debts by paying only a proportion of the amount that it owes to creditors (who are companies or individuals they owe money to);
  • To come to an arrangement with its creditors over the payment of its debts; &
  • A combination of the two.

A CVA is typically used where the underlying business of the company is sound but the company has hit a cash flow problem. The aim for a CVA is to prevent liquidation and to do so more cheaply than administration. The reason this route is cheaper is because it is a less complex process with little Court involvement.

There is no guarantee with this process that the company will be able to avoid administration and/or liquidation because the company can continue to trade and can continue to falter and cash flow problems may become more entrenched.

If you think that any of the above is relevant to you , or if you have any other questions in respect voluntary arrangements, please contact Angus Ashman, Partner and Head of Dispute Resolution.

What is the CVA procedure?

The CVA process begins with the directors of the Company taking advice from an insolvency practitioner. The directors will make a written proposal to the creditors and will identify an insolvency practitioner who will supervise the arrangement.

At this point in the process small companies can apply to have a 28 day moratorium which is a period of time where creditors will be unable to enforce their rights. Otherwise there is no automatic moratorium.

The nominee will then report to the Court regarding the viability of the arrangement. The nominee may then call a meeting of the creditors of the company and its members.

All creditors, aside from certain types of creditors who disagree, will be bound by an approved proposal even if they did not have notice and/or did not attend the meeting. CVA’s are not binding on secured and preferential creditors.

The insolvency practitioner then becomes the supervisor and will report to the Court once the proposal has been approved. The directors will remain in office, but the supervisor will check the implementation of the proposals. The Court may suspend or revoke the approval of the CVA and/ or order that further meetings be called to consider a revised proposal.

At the end of the CVA, the supervisor will make a final report to the creditors and members. Once the final distributions are made by the supervisor they must send notice to the Registrar of Companies, the Court and the creditors and members bound by the CVA informing them that the arrangement has been implemented or has been terminated. This notice must be sent within 28 days of the final distributions.

Are you classed as a “Small Company”?

A small company can obtain a 28 day breathing period “moratorium” which will prevent any claims being brought whilst they put forward a proposal to their creditors.

1. Its annual turnover does not exceed £6.5 million;

2. Its balance sheet total does not exceed £3.25 million; &

3. It has no more than 50 employees.

A company cannot take advantage of this procedure in certain circumstances. We will be happy to advise you regarding your company’s ability to take advantage of this breathing space.

What happens if the debtor company does not comply with the terms of the CVA?

In most cases the terms of the CVA will deal with the issue of compliance.

Also the CVA may provide that the CVA must distribute any assets such as property that he holds in partial satisfaction of the company’s debts.

Can a CVA be challenged?

Yes, on grounds of unfair prejudice or material irregularity within 28 days of the approval being reported to the Court.

Unfair prejudice

The persons who may apply to court to challenge a CVA are:

1. A person who was entitled to vote at either the creditors’ or shareholders’ meeting;

2. A creditor who would have been entitled to vote at the creditors’ meeting if the creditor had received notice of it;

3. The nominee or a replacement nominee; &

4. A liquidator or an administrator of the company.

What is an Individual Voluntary Arrangement (“IVA”)?

An Individual Voluntary Arrangement is an agreement between an individual and his lender (persons to which he owes his debts). It is an alternative to a bankruptcy order.

A borrower will work with an insolvency practitioner to draw up proposals to be made with creditors.

An IVA allows a borrower either:

1. To settle outstanding debts by paying a proportion of the amount that he owes to his creditors; or

2. To come to an arrangement with his creditors over the payment of his debts, his assets being held or controlled in a trust.

When can an IVA arise?

1. A borrower may take advice and try to start an IVA himself;

2. Where a borrower petitions for his own bankruptcy and the debts are relatively small the Court must consider using an IVA rather than bankruptcy. There are criteria which need to be ticked off to be able to petition for your own bankruptcy; &

3. The borrower who is already bankrupt may propose a “fast track” IVA or a trustee in bankruptcy may propose an IVA.

What is the IVA procedure?

Once the borrower has found someone who is willing to be their nominee, they must prepare a statement of affairs for the nominee and should apply immediately for an interim order.

The interim order will have the effect of granting him a break from the creditors taking action against him and his assets until the IVA proposal is considered and voted on. The order creates a breathing space for 14 days no bankruptcy petition can be filed or proceeded with unless leave of the Court is obtained.

If a meeting of the creditors is called, an IVA will come into force if a majority of creditors vote in favour of it. However, certain creditors will not be bound by the proposals.

If the creditors approve the IVA proposals, and a supervisor will follow through on the proposals.

What happens if the borrower doesn’t comply with the proposals?

If the borrower fails to comply with the proposals or if it transpires that the creditors were persuaded to agree to the proposals with false and /or misleading information the supervisor or the creditor may petition for the borrower’s bankruptcy.

To petition successfully, the supervisor must show that one of the following grounds apply:

1. That the borrower has failed to comply with the terms of the IVA;

2. That the borrower submitted misleading or false information in support of his IVA proposal; &

3. That the borrower has not complied with the reasonable requests of the supervisor.

In practice, an IVA will usually detail the consequences of the borrower’s failure to comply with its terms and whether the supervisor will have the discretion to petition for the borrower’s bankruptcy. The IVA may also provide that, on default, the borrower’s creditors are no longer bound by the IVA and may take their own action against the borrower for the balance of the debts due to them.

The Court may order for the IVA to continue even though the borrower is in breach of its terms and that he has had a petition for bankruptcy made against him.

What is the “fast track” IVA?

If the borrower is an undischarged bankrupt, already bankrupt, they may use the fast track IVA. There is a separate procedure for a fast track IVA.

We have acted for a number of creditors in proposing a company voluntary arrangements and individual voluntary arrangements. If you are considering proposing a voluntary arrangement give us a call to discuss we can take you through the process.

Likewise if you are a creditor who is owed money from a company or individual we can advise you as to the actions you can take to recover your money.