A Company Voluntary Arrangement (CVA) is a procedure which can be used to save a company where it has suffered from financial difficulties but still has a fundamentally sound business or part of its business which could survive if it did not have the burden of its debts.
What is a CVA?
A CVA is in effect a contract between an insolvent company and its creditors and is usually therefore a more private matter than alternative forms of insolvency procedures.
Unlike in any other type of corporate insolvency procedure the assets are retained under the Directors’ control rather than being held by the Insolvency Practitioner who is supervising the CVA. The Supervisor, who must be an Authorised or Licensed Insolvency Practitioner, is there to ensure that the contract is being properly adhered to. There are usually no public advertisements and, although notice of the existence of the CVA must be filed with the Companies Registry, no details are published. Papers relating to a CVA are held on a Court file but this is open to inspection only by those parties bound by the Arrangement and not to the public.
A CVA is entered into by proposing to creditors that you will provide whatever assets or income you are able to, so that they will be in a better position financially than if you go into Liquidation. The creditors will be consulted, usually at a virtual meeting such as a conference call, and if 75% in value of those creditors expressing an opinion accept your proposals then it is legally binding on all creditors. Creditors who are associated with you (e.g. directors, members connected companies etc.) have slightly different voting rights.
How does it work?
Needless to say, in detail, the matter is somewhat more complicated. A Statement of Affairs needs to be drawn up, as do detailed proposals which must not only make good commercial sense, but must also comply with the law. A CVA must be done through an Authorised or Licensed Insolvency Practitioner who will usually be closely involved in the preparation of the proposals and the Statement of Affairs.
The next stage is for the proposals and Statement of Affairs to be submitted to the Court by the Insolvency Practitioner, who is called the Nominee at this point in the proceedings, and who must report to the Court that he believes the proposals are beneficial to the creditors and capable of implementation. He will then call a creditors’ meeting and send to all known creditors full details of the proposals and Statement of Affairs.
At the virtual creditors’ meeting the creditors may propose modifications to the proposals such as extending the period of time or increasing the amount to be paid, and then vote on whether or not they wish to accept. The shareholders have to agree to their proposed changes but, if they do not, then the CVA will not be approved. The Nominee, who is Chair of the meeting, will report the result to the Court. Assuming it has been accepted, the CVA takes immediate effect and it is overseen by the Insolvency Practitioner who is now called the Supervisor. If it has not been agreed by the creditors then the company will be back in the same position as if you had not made the proposals.
If the company has creditors who are pressing very hard or a landlord or High Court Enforcement Office (bailiff) is about to seize goods or perhaps a Winding Up Order is about to be made against it, it is possible to hold off proceedings by obtaining a Moratorium by filing a request with the Court. Although this may give you time to hold the creditors’ meeting to get the CVA approved there are problems attached to it. The Moratorium must be advertised, which may be damaging to the business; it also imposes many responsibilities on the Nominee which he may not be willing to take on.
If the CVA has been accepted then, provided that you comply with its conditions (i.e. do everything that you promised to do), then the creditors must accept whatever dividend they receive from the Supervisor in full and final settlement of their debt and can take no further action against the company.
If you do not comply then the Supervisor will report the failure of the Arrangement to the creditors and the Court. Not only will the creditors thereafter be able to put the company into Liquidation but so too will the Supervisor, which he may well do if requested by the creditors.
A Supervisor of a CVA does not have the same powers of investigation and prosecution as a Liquidator or the Official Receiver. Creditors must be satisfied therefore that there has been a full disclosure and that there is likely to be full co-operation before they will contemplate agreeing to one. It is important therefore that you should not propose a CVA unless you fully intend to co-operate and comply with it otherwise all it will do at best is delay the onset of Liquidation. A full disclosure of the company’s financial position to the Nominee is therefore essential, not only for this reason but also because if creditors can convince the Supervisor or the Court that the CVA was originally approved because of misrepresentation, then not only will it fail but an offence may have been committed.