Company voluntary arrangement (‘CVA’) is a potential rescue mechanism and is therefore an alternative to Liquidation, Receivership or Administration. A CVA will require the support of anyone entitled to appoint a Receiver or Administrator. CVA is an easy and comparatively low-cost procedure for rescuing the company.
A CVA can also be proposed by a Liquidator or an Administrator.
A CVA is available for solvent companies as well as insolvent ones. Although a CVA is for the benefit of the company only the directors can apply on its behalf.
During the preparation of the Proposal any creditor can take precipitous actions against the company which could bring it to its knees i.e. Bailiffs.
The big disadvantage of a CVA was the lack of a Moratorium (a ‘freeze’ on debts) but this is available for small companies. One has to apply to court to obtain such a Moratorium. See (b) below for the disadvantage of this procedure.
Third parties are not subject to the CVA, so a creditor could pursue a director who has given that creditor a personal guarantee. (See b) below)
Perhaps the downside of a CVA for creditors is that it may simply be postponing the inevitable - the liquidation of the company.
The procedure for a CVA is as follows:
- The directors make a written proposal; they are normally assisted by the Nominee (an Insolvency Practitioner) to prepare this proposal, which is then circularised to all the creditors. It will identify an insolvency practitioner, known as the Nominee at this point. The Nominee has 28 days to look at the proposal and to report to the Court on its viability. If it is viable, then he decides to call meetings of members and creditors. Creditors must be given minimum 14 clear days form date of receipt of the notice of the meeting.
- It is possible to have a Moratorium on actions by the creditors in the case of small companies by applying for one to the Court. It will last for 28 days after filing the proposal at the Court. It can be extended for up to a further two months, that is giving a total period of almost three months. Floating Charges cannot crystallise during the Moratorium. This procedure is not used frequently because the Nominee can be held personally liable for any liabilities incurred during this period even though he has no control over the day to day running of the company. Nowadays, if the company needs a Moratorium the Administration procedure will be used. (See notes below re this procedure)
- The proposal will be offering contributions to be paid monthly to the Supervisor which will give creditors a dividend from 0 – 100p in the £.
At the creditors meeting, a majority of more than 75% in value of the creditors present and voting is required to approve the proposal. Creditors may put forward modifications which, if approved, will supersede Terms in the proposal.
- Also at the Members meeting the Proposal must also be approved by the majority of Members.
- The chairman of the meeting must report its outcome to the Court, members and creditors and the Registrar at Companies House. Unsecured creditors who had notice of the meeting, and those creditors who have not had notice of the meeting, are bound by the proposal as regards past debts but not as regards future debts.
- Secured creditors are not bound by the CVA. They could find that assets which are subject to their charge are dealt with in a way they disapprove of, or are even impressed with a quasi trust in favour of the unsecured creditors. The company must continue with any arrangements that it has made with the Secured Creditors.
- Once a Proposal has been approved creditors have up to 28 days, from the date the Report is filed into Court, to challenge the decision of acceptance of the arrangement either because the proposal or the Chairman made decisions that were prejudicial against them.
- The Supervisor (previously the Nominee) must be handed control of the assets that are subject to the CVA. In the majority of the cases the “assets” are contributions being made over the duration of the voluntary arrangement, normally 5 years or earlier if creditors are paid in full beforehand.
- On completion of the CVA, the supervisor must make a final report to the creditors and members within 28 days.
- Should the company fail to comply with the Terms of the proposal the Supervisor must fail the arrangement and Petition for the compulsory winding up of the company. In the majority of the cases the Supervisor will be appointed Liquidator unless the court receives objections from the creditors.
The proposal should be comprehensive and must cover such matters as:
- The reasons/history that has caused the company to apply for the Arrangement
- Statutory Information
- Particulars of the company’s assets, and how they are to be dealt with
- The manner in which the liabilities are to be dealt with, particularly secured creditors, preferential creditors, unsecured creditors and debts due to associates of the company
- A Statement of Assets and Liabilities
- The company’s last or up to date management accounts, if available
- A Cash Flow
- Contributions payable and any assets that will be included
- Dividend payable to creditors
- A Comparison of the dividend payable to creditors compared between a CVA and liquidation
- The duration of the Arrangement
- The name, address and qualifications of the Nominee and proposed Supervisor
- The fee of the Nominee and remuneration of the Supervisor
- Whether the business is to continue, and if so, on what terms
- The Supervisors banking arrangements
- Powers and duties of the Supervisor.
There is no register of company voluntary arrangements; details are filed with the Registrar at Companies House.
The above procedure is also available to Partnerships as they are treated the same as company’s. This would be a Partnership Voluntary Arrangement (PVA). In many instances though, due to individual circumstances of Partners, many Individual Voluntary Arrangements will be entered into.
Since the inception of Limited Liability Partnership (LLP) this procedure is also applies to them. The difference here, even though the Members are treated as Partners they are not personally liable for any liabilities of the LLP, unless they have given personal guarantees.